Bank of America Merrill Lynch expects the global economy and markets in 2016 will perform a lot like they did this year, with a few exceptions.
The U.S. economy will continue to lead among developed economies while China's growth continues to falter, though no hard landing is expected and overall global growth will be "slightly disappointing," says Ethan Harris, co-head of Global Economics Research.
Developed markets will outperform emerging markets, and investment-grade corporate bonds will beat high-yield debt. And the U.S. dollar will continue to strengthen against the euro, Japanese yen and Chinese renminbi, though at a slower pace.
"The U.S. is the exception," explained Harris at the firm's "Year Ahead" press event. The U.S. economy is recovering faster than other developed and emerging economies, which is why inflation is starting to pick up here and why the Federal Reserve will raise interest rates in 2016 while Europe and Japan continue to ease monetary policies, according to Harris.
Such central bank "policy divergence" is a key theme in BofA Merrill Lynch's 2016 outlook, which forecasts tighter monetary policy also from Brazil's central bank.
Merrill expects the Fed will raise rates 25 basis points three to four times in 2016 following a hike in mid-December. That's about half the normal pace of a Fed tightening cycle but significant. "One of [the major] central banks is now going to announce 'we're out of the emergency room,'" said Harris.
