CHRISTMAS OFFER Subscribe to Surrey Life today CLICK HERE

What is the future for financial markets in 2016?

PUBLISHED: 09:00 25 January 2016

Archant

Global financial markets have had a rocky start to the year. Simon Lewis considers what lies ahead.

Simon LewisSimon Lewis

Global financial markets are certainly very skittish at the moment. Investors arrived at the end of 2015 with some relief that any losses were generally modest but have welcomed in 2016 with trepidation. Most financial markets have fallen heavily since the start of the year.

There is certainly a great deal of uncertainty about shorter term outcomes but taking a medium-term view, there is much to feel encouraged by.

China

The news media is currently obsessed by economic data from China. This has created the misleading impression that China has a big problem. It doesn’t. In many ways, China is a victim of economic trends and not the cause of them. The issue is that the rest of the world is too dependent on Chinese economic growth at a time when it suits China to drive forward initiatives to rebalance its economy. It is doing so by increasing the services sector and nurturing domestic consumers. This process will improve the sustainability of China’s economic ascendancy but will also, inevitably, reduce the rate at which the economy grows.

Nevertheless, the International Monetary Fund (IMF) is predicting that Chinese GDP growth will still be ahead of 6% in 2017, so nobody can accuse them of not making a worthwhile contribution. If anything, attention should be focused on Japan, which is enduring yet another recession, and the Eurozone, which although improving is doing so at a lack lustre pace.

Taking the view that China is on an economic pathway from which it is unlikely to deviate, the primary factors that are likely to drive the macro economy in 2016 are US interest rates and the price of oil. This does create a feeling of déjà vu because this is what I said last year. The story rolls on.

Monetary policy

Dealing firstly with monetary policy, in December the US Federal Reserve (after some dithering in the autumn) elected to increase the interest rate and set out a predicted pathway of further small rate increases in the coming years. This is a sign that the US economic recovery is deemed to be sufficiently robust to allow the economy to take such increases in its stride and should therefore be viewed as a positive, albeit that some of the short-term impacts are likely to be negative.

This is because the US dollar is the dominant currency of global finance and trade and as a consequence what happens to interest rates in the US has a big impact on the rest of the world. For example, many countries and non-US companies have US dollar denominated debt. An increased interest rate means higher debt repayments and this will be exacerbated by the likely rise in the value of the US dollar as a consequence.

Another factor likely to cause tension in markets (particularly the currency market) is that both the European Central Bank and the Bank of Japan are still printing money and could lower base rates even further into negative territory.

Oil

The oil price saga is a fascinating story of aggressive business tactics and geopolitics. In the run-up to the end of 2014 the price of a barrel of oil was over US$100. Not many predicted that the oil price would halve, not least that this fall would be sustained. In fact, there is a good chance the price will halve again and remain in the US$20-US$30 per barrel price range for the foreseeable future.

It is not the case that the world is consuming significantly less oil than it used to. This story is all about excess supply which has created a substantial glut, to the extent that oil storage facilities around the world are nearly full.

Initially, much of the extra oil supply was the result of fracking in the US, which transformed the nation from a substantial importer of oil to a position of self sufficiency. However, Saudi Arabia has retaliated by increasing its production in an attempt to drive the oil price lower in order to push its new-found competition out of business. There is also a desire to pre-empt the return of Iranian oil to global markets following the nuclear non-proliferation deal Iran reached with the US. Saudi Arabia aims to preserve its market share by driving down the price.

Saudi production has increased by 25%. Until about two years ago Saudi production had averaged around 8 million barrels per day since 1990 but it is now over 10 million barrels per day. It is estimated that Saudi Arabia has hydrocarbon reserves in excess of 250 billion barrels and it will therefore not need to rein back on production any time soon. A lower oil price does impact on the State’s profits (the country is thought to be running a budget deficit of around 20%); wealth is important as it underpins the political powerbase and finances its interventionist policies elsewhere in the Middle East. A resolve to perpetuate this budget deficit for as long as necessary is illustrated by a recent announcement that part of the state owned oil producer, Saudi Aramco, could be offered for sale.

To understand the rationale of its strategy and compute the likely ramifications you need to look at the typical cost of oil production around the world. Saudi Arabia can extract oil at a cost of around US$12 per barrel. It therefore makes a profit when the price is above this. Production costs for Norwegian oil average around US$40 per barrel and for Russia the breakeven price is around US$50. Depressingly, for the UK generally and Scotland particularly, the average cost of production for the North Sea is US$62 per barrel.

There has already been a lot of pain for the oil sector and I expect carnage in the coming year. Countries with a high economic dependency on oil production will also feel further pain; not least Russia, Brazil and Venezuela.

I started this commentary by saying that there was much to be encouraged by. Clearly, geopolitics introduce uncertainty in the short term but we cannot escape the fact that a pathway to the normalisation of interest rates (and as a consequence modest inflation) combined with the stimulation (think a big tax cut) of a substantially reduced oil price are something we can look forward to as investors. The path will be rocky but the journey is likely to be one that was worth embarking upon.


Simon Lewis is writing on behalf of Partridge Muir & Warren Ltd (PMW), Chartered Financial Planners, based in Esher. The Company has specialised in providing wealth management solutions to private clients for 46 years. Simon is an independent financial adviser, chartered financial planner and chartered fellow of the Chartered Institute for Securities and Investment. The opinions outlined in this article are those of the writer and should not be construed as individual advice. To find out more about financial advice and investment options please contact Simon at Partridge Muir & Warren Ltd. Partridge Muir & Warren Ltd is authorised and regulated by the Financial Conduct Authority.

01372 471 550 | simon.lewis@pmw.co.uk | www.pmw.co.uk

More from Surrey Life

16:30

She may have recently moved to the seaside, but Surrey still holds a uniquely “precious” place in the heart of legendary children’s author Dame Jacqueline Wilson – not to mention the crucial role the county played in bringing everyone’s favourite and newly-returning feisty foster-kid to life

Read more
11:59

Great things to do in Surrey this weekend (23, 24 and 25 November): art exhibitions, walks, concerts, theatre, places to visit and other events and ideas.

Read more
Thursday, November 15, 2018

Surrey is full of secret hideaways and hidden gems. Slades Farm on the Wintershall Estate is definitely one of them

Read more
Wednesday, November 14, 2018

The new hotel is set to open in spring 2019 and will be located in the heart of the vineyard, offering sweeping views over the North Downs Way.

Read more
Tuesday, November 13, 2018

From Santa’s Grottos, to Victorian Christmas markets and late-night shopping, we’ve covered what’s on in Surrey this season

Read more
Tuesday, November 13, 2018

Whether you're looking for fine dining, pub grub or exotic dishes, eating out in Surrey has something for everyone. Here's our guide to the best local restaurants and pubs

Read more
Tuesday, November 13, 2018

Having bloomed in Brighton’s restaurant scene over the past decade, The Chilli Pickle opened its second site in Guildford this summer

Read more
Monday, November 12, 2018

Historic Royal Palaces and IMG have announced that Kylie Minogue is the first headliner confirmed for Hampton Court Palace Festival 2019. These will be her only London shows of summer 2019. Here’s how you can get tickets

Read more
Monday, November 12, 2018

Enjoy this linear rail to ramble section of the Thames Down Link route taking the short train-ride from Box Hill & Westhumble to Ashtead before walking back

Read more
Tuesday, November 6, 2018

It’s that time of year when our beautiful countryside is alight with the colours of autumn. Here, we pick out some of her favourite spots to enjoy the seasonal splendour – as well as some perfect places for a post-walk refresher

Read more
Tuesday, November 6, 2018

Found on the stretch of the River Thames between Weybridge and East Molesey, Sunbury-on-Thames is blessed with a village feel where it meets the water. From antique hunts to the joys of river life, here are a few of our favourite reasons to visit

Read more
Monday, November 5, 2018

Verity & Violet are Loui and Jess – a singing duo from Surrey who specialise in blending vintage classics with modern favourites. The two have achieved success in the capital, but are now hoping to attract an audience closer to home

Read more
Friday, November 2, 2018

With the Christmas celebrations seemingly starting earlier every year, it all feels a little too ‘soon’ sometimes, but what if you want to look your best for Christmas & New year celebrations and are considering having cosmetic non-surgical procedures? The Bella Vou Pantiles Clinic offers surgical and non-surgical cosmetic procedures and treatments from a purpose-built private clinic in the heart of Royal Tunbridge Wells

Read more
Thursday, November 1, 2018

Living in England’s most densely wooded county, it’s always a pleasure to witness Surrey donning its autumn finery. Here’s some of the best places to do just that - plus a few pub pit stops to enjoy on route!

Read more

Newsletter Sign Up

Sign up to the following newsletters:

Sign up to receive our regular email newsletter

Our Privacy Policy

Topics of Interest


Follow us on Twitter


Like us on Facebook

Subscribe or buy a mag today

subscription ad

Local Business Directory

Property Search