Every year, Mark Yusko, CEO and CIO of Morgan Creek Capital Management, offers his 10 predictions for the year ahead. This year, he reserved the unveiling of his market insight to Inside ETFs.
In a word, his overarching message was grim, calling for recession in the U.S., credit market collapses globally, and continued weakness in commodities prices, particularly oil. Here are the 10 “surprises” 2016 might have in store:
1. Expect a U.S. recession
Despite massive central bank stimulus, economic growth continues to surprise to the downside. Global trade has collapsed, global exports are flat—conditions that historically lead to recession. According to him, we are looking at a 75% likelihood of recession this year. Yusko also noted that the secular low in interest rates won’t occur until 2020.
2. The Fed might have to backtrack
The Fed missed its cue to increase rates in 2013, and now may actually end up having to consider QE4. Yes, employment is good, but there’s no inflation, and inflation expectations are below where they were in both QEs 2 and 3, he says. Yet the Fed’s talking about raising rates, but there’s “no way they’ll do it.” The Fed should be lowering rates now: “Yellen will have to say she was wrong.”
3. Japan is a solid story
The BOJ has weakened the yen. “Abenomics is working in the sense that it has weakened yen, and started reform,” Yusko said. As he put it, Japan will be the best developed market over the next 10 years, and a much better deal than the U.S. And the good news is that the BOJ is committed to QE, the TOPIX is cheap and P/Es are attractive.
4. Don’t go long oil
Saudi Arabia is recommitted to maximizing oil production. The resumption of Iran trading also helped push the oil market into steep contango—we have excess oil, we have to pay a lot to store it. Oil fundamentals are poor, technical are worse. Don’t get long oil here, he says.
“Oil will go down into the low $20s,” Yusko said. “No chance of uptick in oil due to production in Saudi and Iraq; the futures curve is saying we’re not going above $40 this year. We might get around $40, but it’ll take a while.”
5. European banks—as in mega banks—could face massive losses, if not collapse
The bear market in commodities since 2011 has caused massive losses in European banks, and some are at the brink of insolvency. In other words, Europe holds the chance of being 2016’s black swan event. “European equities are going to continue to struggle. They’re breaking down—a lot of overhead supply to be liquidated [after rush last year], a lot of leverage in the system,” Yusko said.
6. We could have a case of deja vu back to the tech bubble
The U.S. economy and equity markets are resembling the unwinding of the tech bubble in 2002-2003—that unwinding saw a 48% peak to trough move. We just had a flat year, went down 9% and now the “real trouble starts,” Yusko said.
“There’ll be a recession just as sure as the sun rises tomorrow,” he added. “Not sure when, but soon, and there’s a 75% chance it will happen this calendar year.”
And all the talk about investing ex-energy companies, is nonsense, he says. If you subscribe to the wisdom of “as January goes, so goes the market,” consider this: “This is the worst January we’ve ever had in the history of markets—and the January indicator is right 87% of the time,” Yusko said. His suggestion: Don’t go all long, but invest in long/short strategies for protection.
7. Emerging markets may surprise, but in different ways
Emerging markets fall into two different groups—producers and consumers. Key producers continue to struggle, such as Brazil and Russia. These markets are going to remain challenged in the year ahead.
But consumer nations such as China and India “enjoy the tail winds of lower inflation and higher growth courtesy of lower commodity prices,” Yusko said. These two markets will beat the other emerging markets and finish the year higher. In China, he says to own five sectors: retail, health care, tech, energy and consumer staples.
Consider that China has huge reserves to defend its currency; and its government is just now beginning to ease, which is stimulative to the market. India equities, meanwhile, have gone up 5x and P/E is still the same.
“India equities are cheap,” he said. “India will be the greatest story on the planet 10 years from now. Start buying now.”
8. Dollar gets dethroned
The problem with the dollar is that people buy on the rumor and sell on the news. The dollar looks to have made a technical double top, and its upside momentum has stalled. The Chinese currency is one to watch. It’s down 4.8% in 12 months—a downward move that had many investors shaken, but the reality is that a 5% decline is “an adjustment, not a devaluation.”
For comparison, the yen and the euro are down 40% against the dollar. “The Chinese want their currency to be a reserve currency, and it will become one,” Yusko said.
9. Cure for low prices is low prices
Bear market in commodities has destroyed market cap, and there’s plenty of buying opportunities in segments that have seen declines of 70-90% in recent years.
“Most commodities are at the highest level of undervaluation we’ve ever seen,” Yusko said. In this environment, gold may be looking interesting, as may be iron producers, steel companies and transportation-focused MLPs. Calling these commodity-focused companies “generational buying opportunities,” Yusko says they may be great buys over the next year or so, but investors need to brace for volatility.
10.The bus stops here
“Credit markets around the world are going to collapse,” Yusko said. “Bank liquidity has created a bubble across myriad sectors.” There’s little that’s safe right now.
Contact Cinthia Murphy at [email protected].