Investment strategists expressed wide-ranging outlooks in their forecasts for the markets for 2016.
A. Gary Shilling, president and economist, A. Gary Shilling & Co., Springfield, N.J., economic consultant and investment advisory firm, was the most contrarian.
For his best U.S. asset classes for 2016, Mr. Shilling said he is long on 30-year Treasury bonds, both coupon and zero coupon.
“I've been a bull on Treasuries since 1981 when the yield on a 30-year bond was 15.21%, Now it's 3% and it's going to 2%” in 2016. That (drop) would amount to more than a 20% appreciation on coupon bonds and 35% appreciation of zero-coupon bonds, Mr. Shilling said.
“Why? Two factors,” he said. “Deflation is really looming, which tends to reduce interest rates because real rates go up in deflation. So it offsets the decline in yield. The other reason is the safe haven” of Treasuries.
Mr. Shilling's second pick as best asset class is long on the dollar. “Everyone in the world is devaluing against the dollar,” Mr. Shilling said. He said several countries “don't have domestic economic growth” so to get it they increase exports and curb imports by “trashing” their currencies, including in the yen and euro, as well as in Canada, Australia, New Zealand, Indonesia and South Korea.
Mr. Shilling also is shorting commodities. “Because there is just a huge excess of supply and more of it coming,” whether it is copper, crude oil or agriculture commodities, Mr. Shilling said. Overall, he would overweight high-quality bonds and underweight equities.
Krishna Memani, chief investment officer and head of fixed income of both parent OppenheimerFunds Inc. and its institutional unit, OFI Global Asset Management Inc., New York, has a different outlook.
“We expect short-term interest rates to rise primarily because the Fed” will increase the federal funds rate, Mr. Memani said. “The impact of that on the long-term maturities, for example 10-year and 30-year, is going to be very modest if at all. So we expect shortened rates to rise (and) long rates to remain relatively stable.” As a result, the Treasury yield curve will flatten.
James W. Paulsen, executive vice president and chief investment strategist, Wells Capital Management Inc., Minneapolis, takes yet another view.
Mr. Paulsen considers a diversified exposure to real assets, including commodities, as the best asset bet for 2016. All real assets are a challenge for asset owners to implement, Mr. Paulsen said. “You have to be mindful of illiquidity. One way to deal with that is to diversify it out. Don't just bet real estate, don't just bet commodities.” As global growth heats up, commodities, for one, could bounce up, he said.
Messrs. Memani and Paulsen both believe fixed income will be the worst asset class for 2016.
“For U.S. investors, the appreciation in the dollar will take away any potential benefit we may get” out of fixed-income assets globally, Mr. Memani said.
Mr. Paulsen said: “Bonds are going to have a bad year,” because the Fed began in December the process of resetting rates,
But he also added that “everyone should own bonds. I own bonds. I hate them but I own them because I know that I'm wrong.”
Mr. Paulsen also recommended asset owners underweight fixed income “pretty close to minimum long-term parameters.”
Tim Hopper, managing director and chief economist, TIAA-CREF, New York, agreed that fixed income will challenge institutional investors. “You are going to get some downdraft in bond prices as interest rates go up,” Mr. Hopper said, So in 2016 “you want to (be) more nimble. That's where active management can truly shine.”