Outlook 2016: Do You Know Where Your Risk Tolerance Is?

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Every year, we take a fresh look at the themes and drivers likely to influence capital markets and, along with our valuation analysis, inform our asset allocation recommendations. Heading into 2015, we identified five trends that influenced our advice: US dollar strength, weakening commodity prices, elevated US equity valuations, extremely low sovereign bond yields, and crosswinds for credit.1) These trends continue to influence our views.

In this report, we focus on three key areas for investors’ portfolios: (1) developed markets equities, where the stage appears set for more US underperformance; (2) emerging markets equities, where risks are foremost in investors’ minds and where we continue to see opportunities for investors that can focus on the horizon rather than the waves; and (3) commodity-related assets, which suffered mightily in 2015 and may not be quick to recover.

Bouts of volatility, as experienced this year, should serve as a reminder of the evergreen principle that portfolios should be aligned with risk tolerance and return objectives. Such alignment is critical to allow asset owners to withstand volatility and to take advantage of opportunities that may arise.

How the themes discussed in the pages ahead develop over the course of 2016 will affect our recommended positioning to risk assets overall, where we remain neutral today, as well as recommendations for value-related tilts. Watch for the first quarter 2016 edition of VantagePoint, publishing in mid-January, for our total portfolio advice.