There is now a marked cyclical divergence between the developed and emerging markets, and this will hold back worldwide economic growth. In contrast to 2015, Bank Julius Baer's experts anticipate no carrying winds from lower commodity prices or from monetary stimulus in 2016. This will make the world economy more susceptible to external shocks, which in turn weighs on the outlook for market performance. That, however, is no reason for investors to draw in their sails too hastily, since the prospects for internal consumption in the developed economies offer attractive opportunities for investment. Given the international orientation of many Swiss companies, Swiss investors can generally continue to concentrate their investments on their domestic market. The two key exceptions here are high tech and pure emerging-market investments, the latter being an area which Julius Baer's experts expect will offer uniquely attractive entry opportunities during the course of 2016.

Zurich, 18 November 2015 - The world economy is expected to grow by a moderate 3.1% in 2016, in line with its performance this year. This apparently steady outlook does however mask the gap between predominantly positive trends in the developed economies and a general deceleration in growth rates in most of the key emerging markets. As Janwillem Acket, Bank Julius Baer's Chief Economist, warns, 'This marked cyclical divergence represents a serious global economic and deflationary risk, for which no obvious remedy is available, since the scope for monetary-policy measures is virtually exhausted and commodity prices are already low.'

Internal consumption in the developed markets to support world economy

Bank Julius Baer's economic confidence for 2016 is inspired by its outlook for consumer spending in the world's large, developed economies - the USA, Europe and Japan, which are all benefiting from consumers' increased purchasing power and higher rates of employment. The upturn in the US will enter its seventh year in 2016, and now has its zenith behind it. The recovery in the eurozone, conversely, is a mere three years old and still has further potential. The resulting strong levels of demand are helping Swiss exporters to weather the price shocks induced by a strong Swiss franc. Indeed, compared to the now stronger US dollar, the Swiss franc is currently slightly undervalued, which should boost Swiss exports to the dollar area. Against that backdrop, 2016 should see Switzerland's economy recover from the cyclical setback caused by the sudden appreciation of its currency at the beginning of this year.

Risks of deflation persist, danger lurks in emerging markets

While they anticipate that aggregate growth across the emerging markets as a whole will be disappointing, Bank Julius Baer's experts remain confident about the outlook for the two largest emerging markets, China and India. China is now confronting a new reality. In the foreseeable future, it will need to adjust to significantly lower annual growth rates than the ambitious 6.5% targets set in its new five-year plan for 2016-2020. Both Asian giants are major importers of raw materials, and will continue to benefit from low commodity prices. However, in contrast to 2014 and 2015, the overall world economy is unlikely to derive much additional stimulus from declining prices for raw materials next year. The same applies to monetary policy. Despite further key-rate cuts in China and India, real interest rates across all emerging markets, unlike those in the developed economies, remain relatively high and are thus constraining growth. Overall liquidity in emerging-market economies with balance-of-payments deficits is becoming increasingly tight. Since the credit cycle in many of those countries is also well advanced, disruptions cannot be ruled out.

No reason to draw in sails

Five years of deflationary growth have driven equity markets to new highs, while simultaneously reducing interest rates to record, in some instances sub-zero, lows. Given the prospect of less clement economic weather ahead, the return opportunities offered by financial investments are below their long-term average. Despite this, Christian Gattiker, Chief Strategist and Head of Research at Bank Julius Baer, recommends keeping a sense of perspective, 'Given a projected medium-term return on shares of around 5% and with bonds offering positive yields in real terms, there is no reason to exit completely from financial investments yet, particularly since rising prices have now encompassed virtually all real assets - from fine art at auctions to transfers on the football pitch. The only thing we continue to lack is a range of attractive alternatives.'

Swiss investors are best off staying at home, though Nasdaq should not be ignored

One potential pitfall remains. While the tide of the world economy is ebbing away from commodity-driven investments towards consumer-led demand in the world's developed economies, financial markets have not yet fully adjusted to this paradigm shift. This may well mean that although equities have, on average, now passed their cyclical zenith, there are a limited number of shares whose real rally has yet to materialise, and this is likely to drive the overall market higher. The best approach for Swiss investors is to maintain positions in their domestic market and not to concern themselves unduly with international allocation, since the shares quoted in Switzerland largely take care of this for them, particularly as far as currency mix is concerned. That being said, there are a few growth sectors which are either under-represented in the Swiss market, or barely represented at all. In the field of high technology, in particular, there is no real alternative to the Nasdaq. 2016 could also present a historic opportunity for pure emerging-market purchases. Julius Baer's investment experts anticipate that these markets will provide once-in-a-generation buying opportunities next year. The prerequisite for this, however, is for the global investors currently holding positions there to throw in the towel completely, thus paving the way for others to enter these markets at significantly lower, and more attractive, levels.

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