Most western economies are improving slowly, with the US Federal Reserve finally raising its interest rate in December after holding it at an historical low for seven years. The UK seems set to be the next to follow suit. But while European economies also appear more steady, even on the periphery, it appears 2016 will see the continued divergence of central bank monetary policy, with the European Central Bank (ECB) and Japan both continuing their quantitative easing stance.

This is not necessarily a headwind for investors as most have already factored in this effect, but with a US election scheduled for later this year, and with Donald Trump a surprisingly strong contender for the Republican nomination, there is the possibility of an unexpected result that could have a dramatic effect on market sentiment.

So what is the outlook for the different asset classes? Fixed income was one of the stragglers in 2015, with low yields forcing many investors to seek alternatives, or to move higher up the risk spectrum.

Nick Hayes, manager of the Axa World Funds Global Strategic Bonds fund, notes the expected divergence in monetary policy between the US and Europe will be a key theme in bond and currency markets.

He explains: “Unless there is some surprise from central banks, it seems clear that the momentum for an even stronger dollar is likely to persist into 2016. This could generate some asset allocation flows out of European fixed income markets to the US – attracted by an even wider yield spread and potential further dollar gains.

“An increase in volatility could well be seen in the months ahead given the shift in the US monetary stance and the increasingly accommodative strategy of the ECB. If there is any sense that the Fed may be more aggressive than what is currently priced in, then higher bond yields and a more negative reaction from credit markets could be seen.

“In Europe, a sharp fall in the euro could trigger a steeper bond curve if inflationary expectations start to build, and this may be temporarily negative for credit spreads.”

Meanwhile, the US central bank’s tightening strategy should not blind investors to opportunities, according to Pictet Asset Management. Chief strategist Luca Paolini notes: “Our forecast is for another quarter of earnings declines in the US before a recovery.

“But higher interest rates and slowing economic momentum will make conditions more challenging for US companies to outperform their peers elsewhere in the developed world. We like the eurozone and Japan, where stocks are relatively inexpensive and exceptionally supportive monetary policies are set to continue.”

Emerging markets could be the most interesting region this year. Should commodity prices finally start to rebound, and fears over a Chinese slowdown recede, then opportunities may start to appear.

Neptune Chinese equities head Douglas Turnbull points out: “The economic trajectory of China changes little and slowly. Thus we envisage a similar market for 2016 as the broader trend – a market whose aggregate gains will be capped by exposure to ‘old China’ stocks and sectors, but which should make steady progress led by the ‘new China’ areas.”

Nyree Stewart is features editor at Investment Adviser