Research 16th December 2015 2016 promises to be a momentous year, if for no other reason it will mark the first Federal Reserve tightening cycle since 2006. 2016 promises to be a momentous year, if for no other reason it will mark the first Federal Reserve tightening cycle since 2006. The following macro themes stand out to us as 2015 draws to a close: Inflation complacency. Falling unemployment is eventually likely to feed through to rising wages and inflation. Oil prices are falling now but could be clocking double digit gains by this time next year. We don’t think investors are paying enough attention to the prospect that inflation could make a comeback in 2016. The “Rate Divergence”. Our favourite theme from 2015 is still in play: the Fed is tightening, while both Europe and Japan are likely to keep easing. This is positive for non-US equity markets. China’s zombies. We think Chinese growth is at risk of disappointing again in 2016. But unlike last year, investors now expect this. Moreover, if China took meaningful steps to deal with its “zombie” SOE’s, the path to recovery would become clearer. For the first time since 2012, we believe a neutral stance in equities is now appropriate. This move reflects a more balanced set of risks. In particular, a faster than expected recovery in inflation could force central bankers to be less generous with policy settings. That said, “Neutral” is just that: we think equities grind higher next year and it would be premature for investors to shun this asset class. We remain underweight fixed interest investments, and will look to neutralise if bond yields rise to more attractive levels. We continue to believe “rate divergence” and volatility in returns emerging across asset classes will favour active investment management. Accordingly we continue to recommend investors build exposure to low correlation strategies over time.