This year has been full of surprises for investors - from the Swiss National Bank's shock abandonment of its currency ceiling, to the financial market turmoil which came out of China's "Black Friday".
So what should market mavens look out for in 2016?
Interest rates will diverge
The long-awaited interest rate rise looks some way off in the UK and will likely be gradual, providing continued frustration for investors suffering low returns, although a potentially imminent US rate rise may have a more immediate impact (and indeed has already) in increasing yields, particularly in more speculative asset classes.
Take out the trash
The second half of 2015 has been characterised by volatility in the corporate bond market, particularly for higher risk issuers. This is likely to continue in 2016, with risks including transatlantic interest rate rises, continued macroeconomic instability and lower-for-longer oil prices coming home to roost on producers, with both associated and non-associated slowing emerging market growth. Against such an unpredictable backdrop, investors might revaluate their relationship with junk and decide the risks outweigh the rewards.
Head for safe-havens
The slowdown in export-driven emerging markets caused shock-waves across global markets this year, and investor confidence will continue to be tried in 2016. Investors are likely to migrate towards safe-haven investments. However, some central banks have lowered interest rates so far that they are now negative, and in the face of significant recessionary risks for the global economy, what tools they may seek to employ to support markets is yet to be seen.
Cameron's renegotiations with the EU
A referendum is due before the end of 2017 and, while David Cameron is aiming to win concessions from the EU, it’s unlikely he’ll achieve anything material enough to really support the ‘remain’ argument. He’s likely to put the full force of government infrastructure into play to ensure an exit doesn’t happen on his watch – something not likely to be positioned favourably in history books. If however the ‘leave’ camp continues to gain momentum, this could add to volatility in UK-focussed assets.
Increased peer-to-peer regulation
This year saw greater scrutiny of the peer-to-peer sector, following the FCA’s appointment as regulator. With a full review of the rules scheduled for 2016, it’s expected that peer-to-peer will need to comply with similar rules as banks. Investors should be reassured as increased scrutiny improves transparency and standards. 2016 will also be the year banks emerge as players in the alternative finance space. These events will test the robustness of incumbent peer-to-peer operators’ business models, and increase investor options.
The turn to alternative finance
Next year is likely to see increased awareness of SME bonds. Medium-sized private non-financial corporations remain the most starved business segment for credit, and are turning to alternative finance platforms to access this. Security and yield are not mutually exclusive, and the few underserved asset classes that still exist, such as UK SME bonds, can offer compelling alternatives in volatile markets.