“Currency wars aren’t over yet…”

18th January 2016

Colin McLean, managing director at SVM Asset Management asserts that while currency wars may have fallen out of the headlines, he believes 2016 may bring renewed volatility, he explains why…

Overall, conditions are difficult for BRICS and many emerging economies. Those that have borrowed heavily in US dollars could now struggle to repay.

The supply of dollars has slowed down globally due to low oil and commodity prices, which has impacted emerging market borrowing that had previously been helped by an easy supply of cheap dollars.

Many emerging economies are now seeking weak bank lending, but have limited policy options if they want to defend their currencies. Rising US interest rates may exacerbate global disinflation. The dollar shortage could bite in 2016.

The slowing of growth in the global economy and delay in a UK interest rate rise will bring more stimulation in Europe and China.

China’s growth is likely to have slowed from 7% to no more than 4.5%, despite reported figures and at some stage it will need to deleverage.

Investors are only just beginning to recognise and comprehend the extent of risk for the global economy that Chinese debt represents. It has potential to devalue further, triggering volatility for world markets in the year ahead.

Political developments across the globe may be a greater cause for concern in 2016.

Emerging markets are set to face economic challenges that could potentially alter the leadership and policy balance in their regions. Within Europe, it is the UK that may unnerve international investors as Brexit has the potential for severe short-term disruption.

We may see a sell-off in gilts and Sterling in the lead up to the referendum, an unsettling prospect for investors. But the whole of Europe could benefit if British negotiations and vote are a catalyst for EU structural reform. The removal of uncertainty could allow the UK market to catch up to the Eurozone.

Investors should structure their assets to accept increased volatility, ensuring that headlines and short term anxiety do not trigger panic. It is also worth remembering that in 2015 many of the most volatile shares have ended amongst the best performers.

There is also security in the knowledge that politicians are determined to stimulate growth, resolve international frictions and stabilise the global economy.

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