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Global Investment Strategy

October 5, 2015 (Weekly Update)

Tracie McMillion, CFA®, Head of Global Asset Allocation Strategy
Chris Haverland, CFA®, Global Asset Allocation Strategist

Weekly market insights from the Global Investment Strategy team

  • The global economy may grow at a slightly faster pace in 2016. We expect developed-market growth to rise next year, while growth in the emerging markets holds steady at the 2015 rate of increase. Meanwhile, we forecast inflation to rise modestly in 2016.
  • Bond markets may be volatile as the Federal Reserve (Fed) gradually increases its fed funds rate. Corporate earnings growth should support higher equity prices by year end 2016; however, volatility may persist due to fiscal, monetary and geopolitical risks.

What it may mean for investors

  • We recommend that investors move their focus beyond the current day-to-day volatility and maintain their risk-adjusted exposures to equities, bonds, real assets and alternative investments like hedge funds.

2016 Forecasts

As we approach the end of 2015, market participants continue to weigh the impact of a potential Fed interest-rate increase later this year and slower growth in certain emerging economies, including China. We expect the recent volatility to persist through year end and likely into next year. In volatile periods, it is often helpful for investors to look beyond the day-to-day turmoil and set their investment focus out a bit further.

On balance, we think Europe’s economic recovery remains on track. Confidence, spending, and credit growth are improving. The immediate need for humanitarian spending seems manageable for national budgets, although Germany, a popular destination for immigrants, has allocated six billion euros for resettlement. In the coming days, Eurozone budget supervisors will decide whether the crisis justifies easing national budget deficit limits, a move that could modestly boost 2015 economic growth and help lift below-average inflation rates.

The Eurozone and Japan should be supported by accommodative central bank policies, and we forecast economic growth to climb modestly to 1.8 and 1.2 percent, respectively. Emerging-market economic growth should hold steady at 4.4 percent. Positives for emerging economies next year may include stability in commodity prices, falling local interest rates, and a modest improvement in global trade, especially to the developed economies. China, however, could see further deceleration in its growth rate as the country transitions from a construction and manufacturing economy to a consumer-driven economy.

Inflation may increase in 2016, but likely will remain below 2.0 percent for most developed countries. Stabilization in commodity prices, as well as improving confidence, borrowing, and wage growth should combine to move inflation in developed economies up from near zero, albeit still below historical average rates. We are forecasting a modest increase in international inflation, while U.S. headline inflation could end the year close to 2.0 percent.

We expect heightened volatility in the bond markets if global monetary policy diverges as we expect. While accommodation continues in Europe and Japan, we believe the Fed will gradually raise the federal funds rate throughout 2016, ending the year in the 75-100 basis point range. This is likely to create upward pressure, and we expect the yield curve to flatten further. We see the 10-year U.S. Treasury yield in the 2.50-3.00 percent range by year-end 2016.

We believe the bull market should continue for developed-market stocks in 2016, and S&P 500 Index to reach new all-time highs during the year. Our forecast is for the S&P 500 to end the year in the 2100-2200 range, with 6.6 percent in earnings growth. Mid- and small-cap stocks also will likely be supported by solid earnings growth, but valuations are less compelling.

Economic growth should support developed international earnings growth of 8-12 percent. In addition, benefits from stimulus and weaker currencies could boost profits and local returns as the year progresses. Emerging-market earnings should stabilize after four disappointing years, but this may not translate into significant upside in the equity markets. We remain cautious in emerging markets and will be watching commodities, currencies and China for signs of stabilization in the asset class.

The dollar strengthened against a wide range of currencies in 2015, and we expect this trend to continue—but to moderate—in 2016. The U.S. dollar’s two main supports are relatively stronger economic growth and widening interest-rate differentials across countries. Currency movements could also have an impact on commodity prices, which we expect to be volatile in 2016. Oil prices may experience large swings, but should end the year modestly higher, while fundamental evidence suggests a slightly lower price for gold.

Overall, we expect the global economy to continue to expand at a moderate pace with inflation remaining contained in most of the developed world. The bond markets will have to contend with evolving central-bank policies next year, but we expect any shifts to be gradual. Stock prices should be supported by fundamentals, but volatility may be a larger factor as fiscal, monetary and geopolitical risks arise.

Our advice for investors is to refocus your sights beyond the current volatility and look to 2016 as a year that we believe is likely to bring modest growth, low inflation and a continuation of the bull market in U.S. equities. Meanwhile, bond markets may experience some downward pressure from higher rates, but will likely end the year in positive territory from a total-return perspective. REITs may perform relatively well in a low interest-rate environment and hedged strategies may offset some of the expected volatility.

Wells Fargo Investment Institute 2016 Forecasts

Target 2016E 2015E 2014
Domestic GDP Growth 2.6% 2.5% 2.4%
Domestic Inflation 2.0% 0.6% 1.6%
Domestic Unemployment Rate 4.8% 5.0% 5.6%
Fixed Income      
10-Year U.S. Treasury Yield 2.5%-3.0% 2.25%-2.50% 2.17%
30-Year U.S. Treasury Yield 3.0%-3.5% 2.75%-3.00% 0.25%
Fed Funds Rate 0.75%-1.0% 0.50% 0.25%
Global GDP Growth 3.5% 3.4% 3.4%
Developed-Market GDP Growth 2.2% 2.1% 1.8%
Developed-Market Inflation 1.7% 0.4%-0.9% 0.7%
Emerging-Market GDP Growth 4.4% 4.4% 4.6%
Emerging-Market Inflation 5.3% 4.0-4.5% 5.3%
Eurozone GDP Growth 1.8% 1.5% 0.9%
Eurozone Inflation 1.1% 0.4% -0.2%
MSCI Developed-Market Index 1770-1870 1644a 1775
MSCI Emerging-Market Index 790-870 792a 956
West Texas Intermediate Crude Oil Price $44-55 $45.09a $53
Brent Crude Oil Price $50-60 $48.37a $57
Gold Price $950-1050 $1115a $1184
Domestic Equities
S&P 500 Index 2100-2200 1920a 2059
S&P 500 Operating Earnings Per Share $130 $122 $119
Russell Mid-Cap Index 1650-1750 1547a 1663
Russell Small-Cap Index 1100-1200 1101a 1205
Euro $1.00-1.04 $1.12a $1.21

E=Estimated. a=actual numbers as of 9/30/15.
Source: Wells Fargo Investment Institute, 10/05/15. Forecasts are not guaranteed and are subject to change.

Tracie McMillionAbout Tracie McMillion

Tracie McMillion is the head of global asset allocation strategy for Wells Fargo Investment Institute (WFII), an organization that provides global manager research and investment strategy advice to Wells Fargo’s Wealth, Brokerage, and Retirement (WBR) division. WBR is comprised of Wells Fargo Private Bank, Wells Fargo Advisors, Wells Fargo Institutional Retirement, and Abbot Downing businesses, accounting for more than $1.6 trillion* in assets under administration.

In her current role, Ms. McMillion leads the development of global investment strategy. She oversees the creation of asset allocation recommendations and writes economic and market commentary and analysis. Ms. McMillion has been quoted in The Wall Street Journal and Barrons, on CNBC, and in other financial media outlets.

Ms. McMillion has more than 18 years of experience in financial services. Prior to her current role, she served as an asset allocation strategist and a senior investment research analyst for Wells Fargo and predecessor firms. Earlier in her career, she served as lead portfolio manager for Evergreen Private Asset Management where she managed assets for high-net-worth clients and philanthropic organizations.

Tracie earned a Bachelor of Arts in Economics and a Master of Business Administration from the College of William and Mary in Virginia. She is a CFA® charterholder and member of the CFA North Carolina Society. Ms. McMillion is located in Winston-Salem, North Carolina.

*As of Sept. 30, 2014

Chris HaverlandAbout Chris Haverland

Chris Haverland is a global asset allocation strategist for Wells Fargo Investment Institute (WFII), an organization that provides global manager research and investment strategy advice to Wells Fargo’s Wealth, Brokerage, and Retirement (WBR) division. WBR is comprised of Wells Fargo Private Bank, Wells Fargo Advisors, Wells Fargo Institutional Retirement, and Abbot Downing businesses, accounting for more than $1.6 trillion* in assets under administration.

Mr. Haverland is responsible for thought leadership on the economy, financial markets, investment strategy, and asset allocation. He researches timely investment topics and produces market updates, special reports, white papers, podcasts, and webcasts that articulate strategies for clients that help them meet their long-term financial goals. Other responsibilities include developing capital market assumptions and strategic asset allocations, providing tactical advice, conducting asset class research, assisting in portfolio management, writing commentary for investment publications, and providing investment guidance for financial advisors and clients.

Prior to joining Wells Fargo, Mr. Haverland was a portfolio manager, corporate bond analyst and trader at Jefferson Pilot Financial (now part of Lincoln Financial) in Greensboro, North Carolina, where he managed $2.6 billion in fixed income assets. He has nearly 20 years of experience in financial services.

Mr. Haverland earned a Masters of Business Administration from Elon University and a Bachelor of Science in Business Administration from Appalachian State University. He is a CFA® charterholder and is a member of the CFA North Carolina Society. Mr. Haverland is located in Winston Salem, North Carolina.

*As of Sept. 30, 2014

Risk Factors

There is no assurance that any of the target prices or other forward-looking statements mentioned will be attained. Any market prices are only indications of market values and are subject to change.

All investing involves some degree of risk, whether it is associated with market volatility, purchasing power or a specific security. Stocks offer long-term growth potential, but may fluctuate more and provide less current income than other investments.

Alternative investments carry specific investor qualifications which can include high income and net-worth requirements as well as relatively high investment minimums. They are complex investment vehicles which generally have high costs and substantial risks. The high expenses often associated with these investments must be offset by trading profits and other income. They tend to be more volatile than other types of investments and present an increased risk of investment loss. There may also be a lack of transparency as to the underlying assets. Other risks may apply as well, depending on the specific investment product.

Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility. These risks are heightened in emerging markets.

Investing in fixed income securities involves certain risks such as market risk if sold prior to maturity and credit risk especially if investing in high yield bonds, which have lower ratings and are subject to greater volatility. All fixed income investments may be worth less than original cost upon redemption or maturity. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline of the value of your investment.

Hedge strategies are speculative and involve a high degree of risk which may expose an investor to additional risks. Hedge strategies performance can be volatile and an investor could lose all or a substantial amount of his or her investment. Equity Hedge strategies maintain positions both long and short in primarily equity and equity derivative securities. Event Driven strategies involve investing in opportunities created by significant transactional events, such as spinoffs, mergers and acquisitions, bankruptcy reorganization, recapitalization and share buybacks. Managers who use such strategies may invest in, and might sell short, the securities of companies where the security's price has been, or is expected to be, affected by a distressed situation. Activist Strategies employ an investment process primarily focused on opportunities in equity and equity related instruments of companies which are currently or prospectively engaged in a corporate transaction, security issuance/repurchase, asset sales, division spinoff or other catalyst oriented situation.

The prices of small-cap company stocks are generally more volatile than large company stocks. They often involve higher risks because smaller companies may lack the management expertise, financial resources, product diversification and competitive strengths to endure adverse economic conditions.

Investing in commodities is not suitable for all investors. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity. Products that invest in commodities may employ more complex strategies which may expose investors to additional risks.

There are special risks associated with an investment in real estate, including the possible illiquidity of the underlying properties, credit risk, interest rate fluctuations and the impact of varied economic conditions.


Global Investment Strategy is a division of Wells Fargo Investment Institute, Inc. (WFII). WFII is a registered investment adviser and wholly-owned subsidiary of Wells Fargo & Company and provides investment advice to Wells Fargo Bank, N.A., Wells Fargo Advisors and other Wells Fargo affiliates. Wells Fargo Bank, N.A. is a bank affiliate of Wells Fargo & Company.

The information in this report was prepared by the Global Investment Strategy division of WFII. Opinions represent GIS’ opinion as of the date of this report and are for general information purposes only and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally. GIS does not undertake to advise you of any change in its opinions or the information contained in this report. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report.

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