Echelon Magazine - January 2016Add to Favorites

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2016’s biggest risk: Absurd budget assumptions In early 2015, markets were feeling reassured that their year ahead was going to be spectacular. Neither elections nor uncertainty of a coalition government was going to stop Sri Lankan consumers from spending, firms from exporting and Sri Lanka from making giant strides to becoming a services hub. Phew… was that not off the mark! Earnings of listed firms were flat in 2015. Fixed income fared better because inflation was low. Asset allocation is about to get a little trickier in 2016. Few expect corporate profits to rebound this year, so pickings are thin. Inflation will make a comeback, fixed income narrowing real returns. Holding cash, which was a sensible enough thing to do last year, won’t continue to work in 2016 because of inflation, which is already at 4.5% and rising fast. To allocate assets a macroeconomic view will be more important than in the past years because these uncertainties are both altered and elevated compared to the last few years. The government’s budget seems to be making absurd assumptions about income, spending and how the deficit is going to be bridged without causing widespread mayhem. There is little that can be usefully said about the 2016 outlook for the market except that short-term fixed-income instruments are the surest bet. But asset managers and investors won’t be judged on how safe their bests were, but by how much they exceed benchmarks. To achieve this, they should keep a keen eye on macro developments. That’s what will matter the most.

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