All the best for 2016

Last month the International Monetary Fund released their World Economic Outlook. It expects the world to expand in 2016 by 3.6 percent up from this year’s estimated 3.1 percent growth. It is marginally slower than the growth rates of 3.3 percent and 3.4 percent seen in 2013 and 2014.

2016 will begin with a well-defined and anticipated pattern of monetary policy. The Federal Reserve affirmed its plan to increase rates by 0.25% for 4 times during the year to reach a level of 1.25%, the market is pricing less than 4 increases and we see a level around 1% for the end of the year. The European Central Bank plans to keep its interest rate negative and to continue with quantitative easing until March 2017.

In this environment, we forecast a stronger US Dollar to reach eventually parity against Euro. The weakness of oil and other commodities can create credit problems to countries and corporates alike.

Major issues and risks:

• find one majority that can govern in Spain
• contrast inside the European Union
• Brexit
• Middle East and North Africa conflicts

We think that all these major events can also create a potential buying opportunities.

The fall of oil price below $30 per barrel and the decline of other commodity prices has put pressure on sovereign wealth funds to sell their reserves and to the banking system who provided credit to oil related industry.

All this has led to a bad start of the year in financial markets.

The USA Standard & Poor’s 500 and the other major stocks indexes are down 10 percent.

Chinese equity markets are down around 20 percent.

The ECB president Draghi in the conference of January 21st said that eurozone rates would “stay at present or lower levels for an extended period” and that “we have the power, willingness and determination to act. There are no limits how far we are willing to deploy our policy instruments”.

The president of Federal Reserve Janet Yellen will be not less dovish than Draghi considering that just before the USD rate hike in December she warned that if the “outlook worsened, the fed might weight negative rates” adding that “negative rates could help encourage banks to lend.”

Rebus sic stantibus, to invest in the market could be an opportunity particularly in mining and oil companies where we observed the worst performances.

Banks under Pressure

This year begins with a loss for Oil of 22%, Oil and Gas Exploration companies 16%, Chinese Stocks Exchenge 23%, and this was a foreseeable scenario.

Now something different is happening. In the first 40 days of 2016, Deutsche Bank lost -42%, Commerzbank -35%, BNP -28%, Credit Agricole -28%, Santander -26%, Intesa SanPaolo -29%, Unicredit -44%.

On January 1st 2016, a new bail-in system went into effect for all European Banks.  Under this new scheme, EU Governments cannot help the banks, not only the small but also the too-big to fail. Not only the capital, the subordinated debt but also senior and deposits over 100,000 eur can be affected by the bankruptcy of the bank.

At the same time the rules request the banks to increase the reserve for bad credits and the struggling economy increase the number of problematic loans.

As a matter of fact these rules are pushing the banks into problems.

It is more than clear that banks need to increase capital or to issue more subordinated debt, but how can they find someone who invests in this sector with the perspective to lose all his capital and with a public opinion that will enjoy these terrible bankers going into in bankruptcy.

Thanks God the president of European Central Bank knows something about banking system and we hope that his intervention will stop this crazy game.

Many wishes and good luck for a great and rich 2016.