2016: Time to batten down the hatches

2016 could be volatile. The US has finally started raising interest rates and the UK could be next. No one expects the four usual 0.25% increases in short succession, which usually mark the start of a rate rise cycle, but markets don't like the unknown and that is what we are facing as quantitative tightening (QT) begins.

So we are erring on the side of caution in 2016.

When it comes to developed market equities, nothing is really cheap any more, despite the recent sell-off in markets. With central banks now diverging, Europe and Japan possibly have the best prospects in terms of equity investments. Both economies are still in the quantitative easing phase, which was a positive phase for stocks in the US and UK.

We suspect the only way to make any kind of return from bonds will be to look for a decent yield as a cushion from any price falls. With higher yield comes higher risk, so careful selection will be required, especially as most economies are in the stage of the cycle where companies are acting to please shareholders, not creditors.

We are neutral when it comes to commercial property - returns may be more moderate than the past couple of years, but the asset class shouldn't have any nasty surprises in store.

We think it is a bit too early for commodities and emerging markets to start making a comeback. Global growth has to pick up first and QT may well put the breaks on what is already a slow-moving vehicle.

Overall we think targeted absolute return funds are worthy of consideration for any new investments in 2016. They act as a good diversifier in a wider portfolio and the good ones do what they set out to do.

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views are those of Chelsea's research team and do not constitute financial advice.

Published on 21/12/2015