A rollercoaster year so far
2016 began with one of the worst January's for stocks in recent memory as slowing growth in China and sharply lower commodity prices triggered fears that we were on the cusp of a global recession.
It was followed by the wild up and down swings of February as investors tried to digest just how things would play out.
Come March, equities rebounded sharply and ended close to their highs driven by supportive actions by the world’s major central banks and slightly better data out of China.
How has this changed our outlook when investing?
The more supportive stance of US, UK and European central banks is welcome. As such, we maintain our view that that global growth will remain slightly positive this year driven by Developed Markets.
We do, however, think the chance of a worldwide recession has increased. We remain mindful of what could happen if the global economy does take a turn for the worse.
We expect Emerging Markets to remain weak. Things in China remain far from rosy and the improvements seen over March look fragile. The path that China will take to transition to a consumer-led economy remains uncertain. However, it’s likely to be a painful process with heightened risks for the global economy and financial markets.
We strive to produce stable returns across a range of market environments. We therefore increased exposure to assets that will perform well during a recession earlier this year. In particular, if China did take a turn for the worse then we have positions in place to protect against this.
What does this mean for pension schemes?
Despite the market recovery in March, the average pension scheme remains significantly impacted by the moves seen so far this year. In particular, over the first three months of the year liabilities have risen sharply due to significant falls in long-dated UK interest rates. Unless protection was in place deficits will have increased sharply.
Looking forward we are advocates of adding further balance to portfolios. This can be done by moving away from strategies driven by underlying market direction and towards those with a focus on relative value. Also, if you haven’t already, protecting equity portfolios could be a good first step.