BENGALURU Stock markets in developed economies are expected to continue outperforming emerging markets next year, but optimism among hundreds of market strategists polled by Reuters in the past week has faded compared with just a few months ago.
Global stocks have broadly been rallying for several years, jacked up on rock-bottom interest rates since the financial crisis and on trillions of dollars worth of stimulus through bond purchases by some of the world's biggest central banks.
While that era hasn't come to an end yet - the European Central Bank and the Bank of Japan are well-entrenched in their asset purchases - there is a sense that while the hope for returns from such policy remains, its effect is diminishing.
European stocks are forecast to perform best in the coming year. But that optimism may hinge too much on the expectation that the ECB will soon ramp up its 60 billion euros of monthly bond purchases, an idea that met stiff opposition within the Governing Council at its policy meeting earlier this month.
Since August, financial markets have gone through wild gyrations, driven by concerns over global growth and jitters ahead of a now widely-expected U.S. Federal Reserve rate hike later this week, after several delays this year.
Strategists at Morgan Stanley say the global growth outlook likely will improve, but very slowly, giving them reason to be cautious.
"Lower growth means subdued corporate earnings; and continued U.S. dollar strength will likely prove a headwind for equities and emerging market assets," they wrote in their most recent global strategy note.
Crashing crude oil prices have also been acting as a drag on global markets, with investors still fretting over the broad weakness in commodities and whether it is more a story of excess supply or signals an even more worrying weakness in demand.
The latest poll of over 300 equity analysts and fund managers taken over the past week showed all of the 19 stock indexes surveyed are expected to rise between now and the end of next year, but by less than a poll taken three months ago.
"We think the (bull market) is going to continue but we're later into the cycle, so the returns we're expecting are lower than what we got earlier in the cycle," said Jill Carey Hall, equity and quantitative strategist at Bank of America Merrill Lynch in New York.
That may keep an underlying bid in government bonds. A separate poll last week showed disinflation risks, aggravated by the slump in oil prices, will keep major sovereign bond yields from rising significantly in the coming year.
The S&P 500 is forecast to rise by about 6 percent by June next year. It is then forecast to end 2016 at 2,207, up 10 percent from Friday's close of 2,012.37 and 5 percent higher than where it is expected to round off this year.
Key European indices are forecast to gain roughly 10 percent from current levels by the middle of 2016.
That, however, would leave European markets below peak levels reached in April, after making huge leaps in the first quarter. The pan-European STOXX 600 index peaked just above 415 and Germany's DAX just above 12,390.
But analysts, who are again optimistic about what lies ahead, do not have a great track record over the past year.
The S&P 500 is down over 2 percent with just a few weeks of the year left. But around this time last year, strategists as a group were calling for a double digit rise for 2015. They generally overestimated market gains for all the other key stock indexes this year, save for China and Japan.
EMERGING PAIN EMERGING
Emerging market stocks have had a very difficult year, and worries about China's economic slowdown and currency volatility are expected to persist in 2016.
"Any exposure to the China economy through trade and financial links will continue to impact corporate earnings and market risk premiums across the whole region," analysts at Societe Generale wrote in a note to clients.
Shanghai's Composite Index, still recovering from a spectacular summer plunge that grabbed the world's attention, including the Fed, is forecast to end the year at 3,500 points, a bit higher than Friday's close of 3,434.58. But it is then forecast to rise to 3,600 by the middle of next year before adding another 8 percent to end-2016 at 3,900.
India's main stock index is projected to more than regain recent lost ground over the coming year, but analysts were slightly less optimistic, trimming their outlook for the second time in six months.
Brazil's battered stock market is expected to remain a very risky investment in 2016, although Mexican shares are forecast to rise, buoyed by expectations for solid economic growth in the United States, Mexico's top trade partner.
(Additional reporting and polling from reporters in Frankfurt, Hong Kong, London, Milan, New York, Paris, Sao Paulo, Seoul, Shanghai, Sydney, Tokyo, Toronto and Bengaluru; Editing by Ross Finley and Mark Heinrich)