UBS: Market resolutions for 2016

As we close our fourth year of Economist Insights it is time once again to look at the New Year's resolutions that we believe the market should follow. What lessons should the market take from 2015 to avoid repeating the same mistakes in 2016? Our suggestions follow, along with links to the Economist Insights issues that provide more detail.

I must behave like an adult if I want central banks to treat me like an adult.

Central banks need to think about risks, so it makes sense to talk about risks. But when the market scrutinises every word of every sentence, mentioning a new risk is likely to trigger anover-reaction from the market. So when the Fed mentioned risks from China back in September, the market suddenly decided that China was the pivotal factor in the Fed's decision. The Fed themselves likely thought it would have been odd not to have mentioned events in China, but only as a risk. Seeing the childish market reaction to that one line, they removed it in the next statement even though the risks persisted. The market is clearly not mature enough to handle a grown-up discussion of risks. See Splendid Isolation, 2 November 2015.

I must remember that rates can rise.

This may seem obvious to people in many countries, but in the major investment markets (US, Eurozone, Japan and UK) it has been more than eight years since we last saw a rate hike (if we ignore the ECB's policy error in 2011). Despite some doubts on the way, the Federal Reserve finally hiked rates in December. Central banks do not tend to hike once and forget it, so there should be more to come. The question is simply how fast and who else will follow. See Half-Fed, 21 December 2015 and International Monetary Fears, 7 September 2015.

I must acknowledge that lower potential growth means earlier rate hikes.

The market consensus is that potential growth is lower in most economies than previously thought. Since this is bad news, most people assume that this means monetary policy must be looser. But if rate hikes are predicated on narrowing the gap between actual growth and potential growth, the gap will thenbe smaller. Just look at how little growth is apparently needed to bring down the unemployment rate. So lower potential growth may mean an earlier start to rate hikes, although the rates are currently too high, as suggested by the idea of secular stagnation. See Theory of relativity, 1 June 2015, Potentially misleading, 13 April 2015 and Going spare, 16 November 2015.

I must change how I think about the effects of oil on economies.

After oil prices fell sharply in the latter part of 2014, pretty much everyone (ourselves included) thought that this would bring a big boost to the oil importers. In the event, the modest growth was a bit of a disappointment (unless the counterfactual was that growth would have been awful). The behaviour of OPEC has also been unusual, and has led to lower oil prices for longer than many expected. See Side Effects, 28 September 2015 and Show and Cartel, 14 December 2015.

Der vollständige Beitrag als pdf-Dokument