2016 has come in like a lion, at least with regards to stock market volatility. Many of the same factors that sparked a rockier road in the second half of 2015, including declining oil prices and an economic slowdown in China, have been roiling markets so far this year.
Indeed, according to Bloomberg data, volatility as measured by the VIX index, is now at levels last seen early last fall, after China's "Black Monday" stock market crash rattled global markets. Looking forward, we believe the volatility is likely here to stay.
Beyond concerns about commodities and global growth, markets are also struggling with falling earnings, tighter financial conditions, tighter liquidity and accelerating credit downgrades. In addition, with geopolitics taking stage and many currencies outside of the U.S. devaluing, I see few catalysts for a change in sentiment over the shorter term.
Places to find potential growth
But while there are certainly reasons for investors to be cautious in 2016, the choppy road isn't necessarily a reason to run to the sidelines. I believe there still are attractive market opportunities offering potential growth. So, as you prepare your portfolio for the volatility ahead, here are two investing ideas to consider.
Europe. In Europe, the European Central Bank (ECB) recently reiterated its willingness to ease monetary conditions further to stimulate economic growth, possibly as early as its next policy meeting in March. Indeed, according to the central bank's recently released meeting minutes, there's a desire from some ECB members to execute even deeper cuts in their deposit rate, already in negative territory.
In other words, Europe remains squarely in a monetary easing cycle, which is jump starting the region's credit growth and overall business cycles. This environment created a tailwind for Europe's equity markets in 2015, and I expect it will continue to help the region's stocks in 2016.
Japan. The Japanese market is a similar story. Stocks in Japan benefited last year from continued easy money from the Bank of Japan (BOJ), and I see sustained monetary policy easing continuing to support the market going forward in 2016. Additionally, corporate governance reform could continue to improve shareholder returns in Japan into 2016.
To be sure, these markets aren't without risks for U.S. investors, including currency risk. While I expect the yen to continue trading in a very narrow trading range, the euro could decline further, considering that the ECB is in the early innings of its stimulus program. So I advocate U.S.-based investors consider hedging their euro exposure.
Last year, this approach seemed to work. According to Bloomberg data, the MSCI Japan and MSCI EMU 100% USD Hedged Index both outperformed the MSCI ACWI in 2015, delivering 7.6 percent and 4.9 percent respectively, both well above the ACWI index's -3.7 percent return. And I believe this approach could work in 2016 too.
Overall, I see 2016 bringing more of what we saw in 2015, namely increased volatility and the need for investors to be selective in their search for growth and stability. It's clear that news about oil prices and China's growth can quickly create a "risk-off" environment that impacts markets globally. For now, I see growth potential in Europe and Japan, and as I see additional opportunities develop, I'll be sure to write about them here.
This post originally appeared on the BlackRock Blog'.