Blackstone Fortune Teller Sees a Clinton Win, Equities Loss

The US equities market will have a down year in 2016 as the Federal Reserve remains conservative in raising interest rates, according to Blackstone’s Senior Adviser Byron Wien’s annual prediction.

The former Morgan Stanley chief investment strategist foresaw US stocks likely suffering from weak earnings, margin pressure, and a tightening price/earnings ratio. Investors will also continue to keep large cash balances, which could contribute to equities’ poor performance.

The Blackstone adviser predicted Hillary Clinton would win the presidential election for the Democrats, beating Republican candidate Ted Cruz.

“The extreme positions of the Republican presidential candidate on key issues are cited as factors contributing to this outcome,” he forecasted.

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“The weak American economy and the soft equity market cause overseas investors to reduce their holdings of American stocks.”The Fed will also likely raise the interest rates by 25 basis points only once in 2016, Wien wrote, due to the weak economy, corporate performance, and emerging markets. It may even consider reversing the rate hike later in the year, he added.

These market environments will likely keep the 10-year US treasury yield below 2.5%, Wien predicted, with investors continuing to view bonds as a “safe haven.”

“The weak American economy and the soft equity market cause overseas investors to reduce their holdings of American stocks,” Wien forecasted. “An uncertain policy agenda as a result of a heated presidential campaign further confuses the outlook.”

Wien also said China would “barely avoid a hard landing,” with growth falling below 5% and its debt-to-GDP ratio rising to 250%. These fears manifested on Monday when China’s main index plunged 7% to its lowest level in nearly three months, forcing an emerging trading halt.

Other predictions included a darkening long-term outlook for the euro as the refugee crisis continues to divide the European Union.

Oil prices, according to Blackstone’s resident seer, will linger around $30 per barrel thanks to slow global growth and increased production from Iran and Saudi Arabia.

“Diminished exploration and development may result in higher prices at some point, but supply/demand strains do not appear in 2016,” the senior adviser said.

Investors could get tough on financial engineering this year, Wien suggested. Share buybacks, mergers, acquisitions, and inversions may have provided short-term boosts to earnings-per-share, but not investment in research for long-term growth.

Wien’s crystal ball was not all gloom, however. Commodity prices overall earned a stable outlook, as agricultural and industrial manufacturers slow down production.

“Emerging market economies come out of their recessions and their equity markets astonish everyone by becoming positive performers,” Wein said, concluding his 31st annual fortune for the year ahead.

Demand for credit strategies “evaporated” in the second half the year—but asset owners are still forecast to put new money to work in the sector.

Hedge fund inflows declined by roughly 40% in 2015 compared to the previous year, as the under-fire sector continued to post poor performance.

Data firm eVestment estimated a net $66.6 billion inflow for the industry in 2015 to the end of November. This compared to $111.4 billion for the same period in 2014.

“If only a fraction of the traditional equity outflow continues to be directed into the alternatives space, then the hedge fund industry has the support it needs for another positive year in 2016.”The two primary drivers of 2015’s slump were dramatic changes in investor appetite for event-driven funds and credit exposure through hedge fund structures.

“After four years of inflows averaging near $40 billion per year, demand for credit exposure in a hedge fund structure evaporated in the second half of 2015,” eVestment said in a report.

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Event-driven strategies saw a net withdrawal of $11.2 billion last year, compared with $42.5 billion of new money in 2014.

However, the overall industry inflow was supported by renewed interest in managed futures, macro, and multi-strategy funds.

The $66.6 billion figure could be far lower by the time December figures come available, eVestment said, taking into account a “seasonal redemption cycle” of net outflows in each of the past four Decembers.

Despite these data, and other well-known headwinds for hedge fund managers, eVestment predicted that direct investment from institutional asset owners would continue to support the sector.

Pullback from US equities alone—which totaled $630 billion in the past three years, eVestment estimated—has provided a significant amount of “redistributable capital,” the report said.

“If only a fraction of the traditional outflow continues to be directed into the alternatives space, which it is expected to be, and if the hedge fund industry is expected to at least maintain its position within institutional portfolios, which it is expected to do, then the hedge fund industry has the support it needs for another positive year in 2016,” eVestment’s report added.

Only three of 36 hedge fund indexes posted positive returns in 2015, according to Hedge Fund Research’s HFRX index data, covering the full calendar year. The equity-market neutral, merger arbitrage, and absolute return HFRX indexes all posted single-digit gains, while others—including distressed restructuring and event-driven funds—closed with losses.