If there's one overriding outlook for the financial markets in 2016 it's this: No big gains are expected. Which is too bad, since U.S. stocks and bonds are poised to end this year slightly lower while commodities are saddled with enormous losses, especially in the energy sector.
The weakness in oil markets is expected to continue though prices could hit bottom at some point, and the dollar is expected to remain strong though not quite as strong as it's been relative to other major currencies.
Most important, the change in U.S. monetary policy, following the Federal Reserve's first rate hike in almost 10 years, will color market performance not only in the U.S. but globally.
Given this backdrop, investors and advisors need to choose carefully for 2016, then monitor investments closely.
Here are the six best investment themes and picks for 2016 that ThinkAdvisor has culled from myriad outlooks by market strategists as well as interviews with strategists and analysts.
1. Buy Into QE — Favor Japanese & European Stocks Over U.S. Equities
Less than three months after the Fed slashed interest rates to near zero and adopted a massive asset buying program in December 2008, U.S. stocks hit bottom, then rose almost steadily, more than tripling in price by mid-May of this year, before retreating slightly. Now the central banks in Europe and Japan have adopted similar easy monetary policies, using quantitative easing and near zero or negative rates to boost economic growth, which is also expected to buoy stock prices.
"We think this divergence in monetary policy will be broadly a tailwind to European and Japanese assets, while acting as a headwind to U.S. (and potential U.K.)," write Goldman Sachs strategists in the firm's 2016 Global Opportunity Asset Locator (GOAL) report.
That divergence could potentially widen as the Fed raises rates several times in 2016 while the European Central Bank and Bank of Japan stick with zero to negative rates and asset purchase programs. The BOJ recently expanded its QE program extending the maturity of the government bonds it purchases and increasing stock ETF purchases.
Goldman Sachs is overweight both European and Japanese stock markets – Europe because of "resilient growth, accommodative policy and a weaker euro" and Japan because "margin expansion and top-line growth will drive strong earnings growth and double-digit returns."
Bank of America strategists, however, expect that European stocks will return just 0% to 5% on a total return basis in 2016 compared with 11% to 14% for Japanese stocks and 6% to 8% for U.S. stocks.
2. Hedge Foreign Currency Exposure
The divergence in central bank policies will continue to play out in the currency markets, where the U.S. dollar is expected to remain strong relative to other currencies, though possibly not as strong as it has been.
Still, U.S. investors owning foreign assets could forfeit some of their gains because of the currency translation. Investors should "take currency risk more seriously," says Marc Chandler, global head of currency strategy at Brown Brothers Harriman. "Returns could be eroded by dollar appreciation."
Hedging foreign currency exposure can reduce those risks. The currency-hedged iShares MSCI Germany ETF, HEWG, is up 6.05% through Dec. 21, for example, while the unhedged version of that ETF, EWG, is down 2.5%. That's a differential of more than eight percentage points.
There can be costs to hedging strategies, but that's inconsequential or nonexistent if the interest rate associated with the foreign asset is lower than the interest rate of an investor's home country, which is the case now for U.S. investors purchasing European or Japanese stocks or bonds, but not stocks trading in Brazil, where rates now top 14%.
3. Favor U.S. Large-Cap Stocks Over Small- and Mid-Cap
