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The year ahead: what 2016 will hold for the markets

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As we kiss goodbye to 2015 and welcome the new year, what will 2016 hold for markets? Will we view higher US interest rates as good or bad news? Will China's sharemarket volatility re-emerge? Will slow economic growth in Australia mean slow growth in dividends?

Which companies will benefit from the lower Australian dollar and the recent free trade agreements? Is China's slowing growth a serious issue for our economy? Will oil prices stay low? Will we face an early federal election?

So many questions! Time for some answers.

2016 outlook markets

Strange as it may seem, rising US interest rates are good news. Companies in the US are expanding again. They are creating jobs, making profits and paying tax.

The US's Dow Jones Index may have a soft start to the year but it has little to fear from a strong economy and slightly higher interest rates.

Locally, inflation is slow and interest rates are low. Both seem set to stay that way throughout 2016. There is an outside chance that the cash rate could go lower but I doubt it. Fixed rates here could move higher as US rates rise; but Europe and Japan's "money printing" should prevent a sharp, destabilising increase in fixed rates.

The $A is about 33% lower against the US dollar than it was at the end of 2012. That is a massive discount and a solid boost to the competitive position of our companies. Will companies in your portfolio benefit? Most likely they will.

The $A seems likely to remain around current levels until commodity prices or the Reserve Bank's cash rate picks up. And that won't be any time soon.

China's economic growth is slowing. But should we be alarmed? Short answer, no! Growth around 6.5%pa between 2016 and 2020 will generate more annual demand than 10% growth did back in 2005. Why? The pie is now far bigger.

If you are sceptical, do the maths. There are opportunities for local companies in food manufacturing, health services, leisure, travel and much more. The recently signed free trade agreement with China could also open new doors to trade.

And then there are the free trade agreements with Korea and Japan, plus the broader Trans-Pacific Partnership agreement. Surely the TPP will offer new opportunities as ratification unfolds.

And so to other local issues.

In 2015, companies associated with the housing boom did well. They supplied the building materials and met the needs of those seeking to fill their new "nests". Judging by building approval figures, another good year is in store but the pace of new approvals is in decline, so pick your stocks well.

The 2016-17 budget is due in May and is unlikely to contain "mega-nasties". A more likely scenario is a bland but tight budget accompanied by further discussion on tax reform and innovation - none of which will greatly unsettle markets. What could unsettle consumers and markets is a snap federal election.

The Christmas-new year break affords time for reflection. Markets will cope with the notion of higher US interest rates - they've been coming for a long while and they will rise slowly. "Spooked" markets are in no one's best interests.

Of course there are risks ahead. Emerging market debt has grown too rapidly for comfort. Geopolitics can turn sour and political bickering can derail confidence. But let's face it, our economy continues to grow and create jobs. The US economy is performing well, the Chinese economy continues to modernise and Europe is gradually recovering, assisted by super-low interest rates.

The current environment, as well as the outlook for early 2016, is not bad. Low interest rates and a weaker dollar should continue to act as gentle tailwinds for the economy and for the Australian sharemarket.

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