Mark Lister: Expect more ups and downs next year

With global growth looking modest and inflation pressures extremely low, it is difficult to see interest rates going anywhere but sideways, or further down. Photo / AP

Many of the investment themes that were prevalent in 2015 look set to continue in the coming year. Slower growth, lower returns, and more ups and downs could all form part of the investment roadmap for 2016.

With global growth looking modest and inflation pressures extremely low, it is difficult to see interest rates going anywhere but sideways, or further down.

While the US might continue its very gradual hiking cycle, there'll be no such increases in New Zealand or Australia. In Europe and Japan, interest rates are already at zero and further stimulus is likely.

Market volatility increased sharply in 2015, but rather than being a short-term dynamic, it might simply be moving back to normal after a few unusually quiet years.

We will see sharper reactions to good and bad news from shares, currencies and commodities, meaning more strong days and more rough days for investors.

Share price gains could be more subdued in 2016, and dividends will contribute a greater proportion of returns. Valuations are above long-term averages in many regions and combined with slower growth, this points to much less room for capital gains.

The NZX50 has been solid in 2015, returning around 9 per cent, half of which came from dividend payments. This is much softer than the 19.4 per cent average of the previous three years, and closer to the 10-year average of 6.3 per cent.

Investors would be wise to expect something similarly modest in the year ahead.

Geopolitical issues are likely to become more frequent in 2016, at times putting pressure on investor sentiment and market stability. Numerous risks remain, including the ongoing conflict in the Middle East, rising tension between the US and China, and the Russian military build-up.

While Fonterra seems hopeful the worst has passed for dairy prices, there isn't likely to be much respite on the horizon for oil and other commodities.

Increased volatility could become new norm with geopolitical tensions weighing on investor sentiment We will see sharper reactions to good and bad news from shares, currencies and commodities, meaning more strong days and more rough days for investors.

Price stability is probably the best oil producers can hope for, rather than a strong rebound in prices.

Companies in the business of oil and resources are clearly disadvantaged by this outlook, but there are many who will benefit. Lower oil prices are usually a positive for countries where consumer spending represents a larger share of the economy, such as the US and Europe.

As a net importer of oil, New Zealand is also a beneficiary of this weakness.

Emerging markets have had a rough year, and it's hard to see that changing anytime soon. A stronger US dollar usually spells trouble for emerging markets, as do low commodity prices and the prospect of money moving back to the US.

Developed markets are again likely to be a safer place to invest in 2016.

Locally, persistent dry conditions are one risk that could derail our otherwise steady economy, and this would be one thing that could sway the Reserve Bank back into rate-cut mode.

While agriculture faces a challenging outlook, the economy remains in better shape than many others around the world.

The currency is in a relative sweet spot, interest rates are at record lows, tourism is firing strongly and there are plenty of corporate good news stories out there.

I'm picking New Zealand to again be a relative bright spot in 2016.

• Mark Lister is head of private wealth research at Craigs Investment Partners. His disclosure statement is available free of charge under his profile on www.craigsip.com. This column is general in nature and should not be regarded as specific investment advice.