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What will move global markets in 2016?

Morningstar's Robert Johnson names the economic trends that will create opportunities in the upcoming year.

Jess Morgan 2 December, 2015 | 6:00PM
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2016 Trend #1: Demographics

Robert Johnson: Population growth around the world has slowed relatively dramatically. Here in the U.S. we went from 1.8% population growth in the 1950s and '60s to 0.7% now to perhaps as low as 0.5% in the year ahead. So, it's very hard to grow GDP a lot faster than population growth. So, certainly, that's going to help hold back growth compared to what it was in the 50s and 60s and that trend is playing out around the world. It started out earlier in Japan, where we're seeing pretty dire effects from the population slowdown, to China, where we're just slowly kind of moving into that, and then maybe in India, where it's got long ways to go before they kind of hit that demographic wall, if you will.

So that's certainly weighing on world growth and will for some time and also, the mix of that population is changing. We've got fewer younger people than we used to, and that's really kind of changed things dramatically, especially maybe in the developed world where now we're seeing more interest in things that are kind of health-related, travel-related, in general personal services-related, and a little less related to accumulating more goods, because on the older people side of the curve, we've got people downsizing the smaller units and needing less goods in trying to make their lives simpler. And on the other end of the scale, we've got the millennials, who are more interested in experiences than status symbols and goods. So that's another key worldwide trend that's weighing on the data and kind of shifting things more towards the service-oriented economy and also, at the same time, weighing heavily on commodities.

2016 Trend #2: Commodities

Commodities have had a rough five-year period. I mean, they did a little bit better coming out of the recovery and frankly, since about 2010, we've been on a pretty strong downward trend in commodities. We had a little spike in some of the food-oriented commodities in 2011; but in general, commodities haven't acted well since 2010. Frankly, this trend, this demographic trend, fits right in with commodities. I mean, it's really kind of holding things back on the commodities front because what do you need commodities for? You need them more for things than services. So, certainly, that's held it back.

Certainly, cheap money has helped increase the supply of a lot of commodities. That's kind of caught up and we kind of see that in the oil industry, in the shale industry here in the U.S. It has really kind of brought up the supply side of the equation. So you've had demand stabilizing and supply increasing and that's weighed on a lot of different commodity categories. And certainly, the elephant in the room is China, which is a big consumer of commodities, and again, we mentioned the one-child policy is beginning to slow down their population growth and their working-age population is also about to go into decline mode. Certainly, as that happens, they put more emphasis on internal consumption and a little less on infrastructure building and road building, the things that tend to be intensively commodity related. They use huge percentages of the world's copper supply, paper supply, lumber supply, and as they de-emphasize those categories, it certainly had a huge impact.

Even as the relative growth rate stayed at 6.8% in China, it certainly has been held back by what's happening on this shift to a more consumption-oriented economy, and whether it's copper or nickel or oil, they are all being affected by this slower growth in China. For a while, when China was growing like crazy, they were very careless with their resources. They were flaring gas, they were running steel plants that wasted so much energy and created a lot of pollution, and now they can't support that kind of pollution anymore. It's hard to get into Beijing Airport some days because of the bad pollution. Certainly, that's focused them on reducing some of this heavy industry, which is reducing the demand for commodities.

So, almost in looking at the world, are you a commodity user or a commodity producer? That really delineates if you're going to do well or not as well. Certainly, India is an example of more of a user and they will probably do better. The U.S. has got a decent mix of use and production, so they are okay. Europe is probably on the beneficial side, and a lot of the developed world. On the other end of the equation, you've got the Brazils and the Russias of the world that were very dependent on commodities, and on top of it took advantage of all the growth in commodities, but didn't take the opportunity to restructure their economies and to clean up their act, if you will, and they both still have big infrastructure and governance issues that they didn't fix. So those economies not only have the commodity situation, but some of their own internal messes to deal with.

So that's certainly how some of the commodity things have played out and certainly, even in Canada, it's an interesting story. I mean, certainly, commodities are an important part, maybe not as much as people think, but at least some part of Canadian growth, and we've seen that Canadian growth slow as commodities have slowed. But that tends to affect more of the western part of the country. The eastern part is benefiting from a strong U.S. auto industry, which not only helps Canadian, auto industry but a lot of the Canadian metals business as well. Certainly, a better finance market in the U.S. helps some of the Eastern Canadian financial centers do a little better. So you've kind of got the tale of almost two countries. Net, you won't get a hit the way that somebody like a Brazil or a Russia is being hit, but certainly it's diminished the growth potential in Canada over the next several months and maybe even in the next couple of years.

2016 Trend #3: Technology

I think it's going to have a big impact, and I think we have talked so often in the United States; it's little less in some countries and a little bit more in others, but certainly there is a big issue of labor shortages. The number of people in the working-age population is set to decline here in the U.S. and I mentioned even in China over the next five years it's set to decline. That's really created some pretty strong issues in terms of how fast can a country grow if they don't have an adequate number of workers. Well, fortunately, some of the technology items you mentioned, it is certainly something that will help offset some of that shrinking working-age population situation a little bit. So it's certainly good news that some of that newer technology will help move us forward on that.

2016 Trend #4: Economic Policy

I think the U.S. in some ways was kind of a leader in looking at interest rates as a tool for a softening economy and I think they caught on early. Certainly, when the Fed used some of the more aggressive quantitative easing programs, which were kind of unprecedented in the past history, especially in times that were okay, not in the middle of a horrible recession that they instituted some of the more recent QE measures. And certainly, if you set that aside, Europe who was kind of a little bit slow to implement them, the economic growth in the U.S. has been far stronger than it was in Europe, and certainly part of that equation was the more favorable monetary policy.

So now the U.S. has gotten the benefit of it and as inflation begins to pick up a little, they will need to raise rates. Certainly most of the rest of the world is still in a mode where I think they will keep rates relatively low for some time. I don't think 2016 is going to see many people outside of the U.S. and maybe the UK and maybe a couple of the emerging markets outside of a very few, I think rates will stay pretty low next year, which will create a pretty conducive environment for growth, and that may be why some people are so optimistic that next year's growth will be quite a bit better than the growth in 2015 despite the unfavorable demographics that we've already highlighted.

So I think monetary policy has been more important than I would have guessed over the last two or three years. Now, as we look ahead, I think that things will tighten up little bit in the U.S., but certainly not enough to slow the economy at all. In fact, the tightening will occur only as economic improvement occurs, and I think the rest of the world will continue to benefit from low rates that will offset some of those poor demographics that we talked about.

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About Author

Jess Morgan

Jess Morgan  Jess Morgan is the associate editor of Morningstar Canada’s website. She began her career as a television producer and freelance writer, often making appearances on TV and radio as a commentator on politics and culture. She holds a BA in communications from the University of Winnipeg and a diploma in Creative Communications from Red River College.

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