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2016 Outlook

JANUARY 2016

This 2016 outlook provides continuing insights on topics like expanding U.S. growth, economic recovery in Europe and Japan, ongoing market volatility and global dividend opportunities.

 

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“I need my portfolio to grow but worry about world events. How do I get growth in the current environment?”

Highlights from this section include:

U.S.

The Brightest Spot in the Global Economy

With American consumers flexing their muscles again, the U.S. economy is experiencing moderate growth. But given an uncertain growth picture abroad and fluctuating energy prices, expect greater volatility.

Related Insights:

New for Q1Healthier Consumers Bolster U.S. Growth Against External Pressures

Welcome Back Volatility

U.S. Valuations Should Be Judged in Broader Context

Consumers, Start Your Engines!

International

Selectivity Is the Key

The path to full economic recovery in Europe and Japan is uncertain, but central bank stimulus, currency weakness and falling energy prices are providing tailwinds for select companies. European periphery countries also present opportunities.

Related Insights:

New for Q1Crosswinds Send World's Economies on Diverging Paths

New for Q1In Europe, Recovery Elusive, but Valuations Look Attractive

New for Q1Pack Your Bags for Japan

While Europe Plays Catch-Up, Valuations Look Attractive

Don’t Fight the “Feds”

Emerging Markets

More Volatility, More Value?

China’s woes have put some economies in a tough spot. Less demand growth for commodities and other exports could spell further setbacks for investors. But volatility may have a silver lining for selective investors: unusually attractive valuations.

Related Insights:

New for Q1China Syndrome: Growth Slows as Consumers Throw Weight Around

As Macro Economy Founders, Chinese Consumers Go Shopping

China’s Economy-in-Transition Still Ripe for Investment

Emerging Markets Are Now Diverging Markets

 

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"I rely on my investments to produce income but low stock and bond yields present a big challenge. What’s the right approach to income generation in today’s market?”

Highlights from this section include:

Dividends

In Hunt for Dividends, Go Global

Opportunities to invest in blue chip, high dividend-paying equities have gone global.  Companies that can generate dividend growth have also been less sensitive to rising rates and may offer a measure of stability in an uncertain environment.

Related Insights:

New for Q1Want Dividends? Go Global

Push for Better Corporate Governance Pays Dividends in Japan

Evolving Japan Now Offers Intriguing Opportunities

Dividend Growers Look More Favorable When Rates Rise

Bonds

Lower for Longer

U.S. interest rates may be heading higher, but the Federal Reserve is in no mood to move quickly. The “lower for longer” scenario remains intact and bonds continue to provide important diversification.

Related Insights:

New for Q1Lower for Longer: Expect a Slower Path to Higher Interest Rates

Bond Investors Don’t Need to Fear Rising Rates

Fed Weighs Market Jitters as It Ponders Rate Hike Timing

Will a Rise in U.S. Bond Yields Be Held Back by Weight of the World?

Releveraging of Corporate America Raises Concerns

Munis

Attractive Yield Opportunities

Choppy waters for stock markets barely register as a ripple in munis. Revenue bonds may offer a particularly attractive source of income and capital preservation. Should munis be a bigger part of your portfolio?

Related Insights:

New for Q1Who Said This Is a Low-Yield World?

New for Q1Show Me the Munis!

Looking for a Source of Potential Diversification?

A Strong Dollar Has Been a Blessing and a Curse

 

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U.S.

International

Emerging Markets

Municipal Bonds

Taxable Bonds

Headwinds

  • Weaker overseas demand and a stronger dollar could further dampen export activity
  • Tighter monetary policy likely will lead to increased volatility
  • Structural underemployment
  • Slowing emerging markets demand
  • Political opposition to further support for financial system
  • Deflation in Europe could impact asset prices
  • Repercussions of China’s economic adjustment
  • Further currency weakness is possible, but may be relatively limited
  • Higher U.S. rates may prompt volatile asset flows
  • Potential for modest rate increase in 2016
  • Presidential election cycle could drive focus on tax policy changes
  • Potential for modest rate increases in 2016
  • Valuations are high for most bonds
  • Fed faces challenge of managing rate increases

Tailwinds

  • Labor market continues to strengthen
  • Household debt is at multiyear lows
  • Lower energy and import prices boosting purchasing power
  • Inflation remains tame
  • Political will to find a solution to sluggish economic growth
  • Currency weakness helping exporters
  • Industrial production and other leading indicators are starting to pick up in Europe
  • Political change, economic reform support confidence in
    certain markets
  • Fiscal and trade imbalances are improving
  • Chinese monetary policy should benefit growth
  • India benefiting from low oil prices, corporate reform
  • Generally strong municipal balance sheets
  • Relatively low level of new issuance in 2016 likely to be constructive for bond prices
  • Muni market is U.S. focused and less susceptible to global
    volatility
  • Relatively low interest rates for now
  • Geopolitical unrest may spur safe-haven assets
  • Foreign buying of U.S. Treasuries
  • Rising demand for bonds from pension funds

Key Takeaways

With no obvious imbalances the U.S. economy should continue on a growth path, with particular strength among consumer-oriented companies.

Economic recovery may be tentative, but companies often adapt. Look for select companies that can pivot to pockets of opportunity across markets.

China, Brazil and Russia are struggling with a number of challenges, but volatility can offer opportunities to invest in leading securities at compelling valuations.

The municipal market offers compelling yield opportunities in a number of areas, as well as potential tax advantages and diversification.

The “lower for longer” scenario remains intact and bonds continue to play an important risk-dampening role in portfolios.

Investments to Consider

AMCAP Fund®

A – AMCPX; C – AMPCX;
F-1 – AMPFX; F-2 – AMCFX

American Balanced Fund®

A – ABALX; C – BALCX;
F-1 – BALFX; F-2 – AMBFX

Capital Income Builder®

A – CAIBX; C – CIBCX;
F-1 – CIBFX; F-2 – CAIFX

EuroPacific Growth Fund®

A – AEPGX; C – AEPCX;
F-1 – AEGFX; F-2 – AEPFX

New Perspective Fund®

A – ANWPX; C – NPFCX;
F-1 – NPFFX; F-2 – ANWFX

New World Fund®

A – NEWFX; C – NEWCX;
F-1 – NWFFX; F-2 – NFFFX

American High-Income Municipal Bond Fund®

A – AMHIX; C – AHICX;
F-1 – ABHFX; F-2 – AHMFX

Limited Term Tax-Exempt Bond Fund of America®

A – LTEBX; C – LTXCX;
F-1 – LTXFX; F-2 – LTEFX

The Tax-Exempt Bond Fund of America®

A – AFTEX; C – TEBCX;
F-1 – AFTFX; F-2 – TEAFX

American Funds Inflation Linked Bond Fund®

A – BFIAX; C – BFICX;
F-1 – BFIFX; F-2 – BFIGX

The Bond Fund of America®

A – ABNDX; C – BFACX;
F-1 – BFAFX; F-2 – ABNFX

Capital World Bond Fund®

A – CWBFX; C – CWBCX;
F-1 – WBFFX; F-2 – BFWFX

 

Related Literature


Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.

Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses or the collective investment trust's Characteristics statement, which can be obtained from a financial professional, Capital or your relationship manager, and should be read carefully before investing. 

Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. This information is intended to highlight issues and not to be comprehensive or to provide advice.