2016 Markets Outlook: Return of Value Investing

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  • Glass Half-Full: Bullish on Stocks, Not Sectors;
  • Year of Modest Global Growth: U.S. Grows, China Slows and Brazil Contracts;
  • More Volatility as Monetary Policies Diverge, Rates and Regulations Collide

BofA Merrill Lynch Global Research today released its outlook for the markets in 2016, forecasting a year of modest global and U.S. economic growth, the start of a slow, emerging markets recovery and single-digit stock returns led by high-quality cyclicals. However, with the world’s two largest economies – U.S. and China – set to diverge on monetary policy and a contrarian expectation of further weakness in China, next year’s market outlook is fraught with credit, rates and currency risks.

“The greatest opportunities for investors may be found among carefully selected, healthy dividend-paying stocks and thematic investments in innovators reshaping market dynamics over the next decade.”

BofA Merrill Lynch presented their 2016 Year Ahead Outlook today at events held in New York and London, with similar events this week in Tokyo, Hong Kong, Sydney, Singapore, Sao Paulo, and Mexico City. Analysts from the top-ranked global research firm summarized their views on the U.S. and global economies with tempered optimism. When the Federal Reserve begins raising the Federal funds rate, monetary policy is expected to take center stage as the key theme for 2016. However, low inflation, improving fundamentals and supportive policy should bode well for global economic expansion, consumers and opportunistic investors.

Cautiously bullish, the firm’s house view is for stronger growth and higher rates; however, virtually every sector is facing macro risks and innovation disruptors. Value investing is expected to outperform growth beginning in 2016, and Main Street is expected to outperform Wall Street as the tailwind of low rates, oil prices and rising employment continues to benefit consumers.

“We’re seeing an aging bull market with a lot of upside potential in it, but also the beginning of slow, steady growth in the capital markets and innovation-led shifts in business cycle,” said Candace Browning, head of BofA Merrill Lynch Global Research. “The greatest opportunities for investors may be found among carefully selected, healthy dividend-paying stocks and thematic investments in innovators reshaping market dynamics over the next decade.”

Against this backdrop, the BofA Merrill Lynch Global Research team made the following 10 macro calls for the year ahead.

1. S&P 500: The ultimate “anti-credit play.” The Standard and Poor’s 500 Index is expected to reach 2,200 by the end of next year, beginning a slow trajectory toward 3,500 in 10 years. Gains in the year ahead imply a 5 percent return for the S&P, roughly equivalent to earnings growth or a 2016 EPS forecast of $125. With credit-sensitive investments the biggest risk in 2016, the S&P 500 could be viewed as the ultimate anti-credit play: large, liquid stocks with healthy balance sheets and above average cash balances.

2. Modest U.S. and global economic growth. Global GDP is forecast to grow by 3.4 percent, up from 3.1 percent in 2015, which is slightly below trend. Growth of about 0.5 percent faster than trend is forecast for Europe, the U.S. and Japan. In the U.S., GDP growth is expected to remain steady at 2.5 percent next year as a solid labor market offsets weak productivity growth.

3. Gentle rise in inflation. Globally, headline inflation is expected to inch up to 2.8 percent as the effects of commodities price drops begin to fade. Underlying inflation should remain stable, with key differences between developed and emerging markets. By year-end, U.S. unemployment should reach 4.5 percent, causing a gentle rise in inflation next year, including wage and price inflation at 0.5 percent and 0.2 percent respectively. Emerging market inflation could decelerate to 3.8 percent, down from 4.3 percent in 2015. The strongest El Niño weather pattern in 18 years represents a potential upside risk to inflation, particularly in Asia and Latin America.

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