Today, everyone is aware of the lack of pricing power of commodity businesses just as they became aware of the complexity and leverage inherent in bank business models in 2008. Likewise, all the economic analysis at the time was centred on whether the US was returning to the Depression status of 1929-42, just as the debate today is about a hard landing for China and a return to the Asian crisis years of 1997-98.

Challenges loom for emerging markets as credit creation slows, China rebalances and interest rate increases beckon in the US.

Indeed, three years ago it appeared every CEO wanted to outline their plans for expansion in emerging markets. Today it is done with almost a sense of embarrassment. Still, the increasing proportion of UK company revenues derived from emerging markets make these issues more relevant to UK investors than ever before – this is something we have recognised and actually look favourably upon. Nevertheless, the UK economy continues to outperform and is perceived as a safe haven with stable government and attractive levels of economic growth. Few would have thought that UK GDP growth in 2015 would have exceeded that of Brazil, Russia, South Africa and Mexico.

So following a relatively volatile 2015 for UK equities what do investors have to look forward to this year? Are central bank rate rises already reflected in valuations? Will negative sentiment towards China begin to reverse?

Unfortunately, while we will be watching developments in these topics closely we won’t be able to give you an answer. Why? Well as Niels Bohr so candidly put it “prediction is very difficult, especially if it’s about the future.” We can, however, equip you with our view – which in a nutshell is that 2016 will likely be another tough year and there will be three main challenges for UK equity investors:

Commodity conundrum

The first issue is deciding when to add to resource-related stocks. These have been notable underperformers given very weak commodity markets and are clearly facing a challenging market backdrop. Investors will need to be selective and focus on high-quality businesses with strong balance sheets and capable management teams. Companies that come through this tough period will emerge stronger with the capacity to benefit from both a cyclical upturn and market share gains from their weaker competitors. It will be impossible to pick the bottom with certainty but identifying the right names and averaging investment at attractive valuation levels should prove rewarding. Typically, we prefer niche service companies with plenty of aftermarket support and/or strong market positions such as Rotork, an industrials company which specialises in actuators and the systems and support services required to operate them in the valve industry.

Valuation discipline

Now more so than ever investors need to be careful not to pay too much for any business. Many favoured stocks are trading at record valuation levels as a result of ultra-loose monetary policy. Investors are paying a significant premium for what is in many cases just stable growth and need to make sure that they don’t get their fingers burned. Even with the best companies, there is such a thing as too high a price.

Keep searching for new opportunities

Lastly, persevering in the hunt for opportunities will be vital. The UK has a broad and deep market with plenty of great businesses. One of the key challenges every year is to put the legwork into researching all of the sectors throughout the UK and visit many hundreds of companies with a view to unearthing just a few potential gems that can deliver our clients great long-term returns.

In our opinion, if we can execute well on these three areas we will have solid foundations in place for the years ahead.

Confidence in convictions

Despite the negative sentiment, we still see strong underlying sales growth for many of our investee companies in emerging markets, such as Unilever and AstraZeneca. Emerging markets accounted for 57% of Unilever’s total turnover in 2014 and emerging market sales growth has averaged 9% over the past five years. The opposite of what some commentators would have you believe. The lesson is that the troubles facing businesses are generally more reflective of good old-fashioned cyclical pressures rather than permanent structural change, though in the near-term they can both be equally painful.

The deep knowledge we gain from our fundamental approach to investment gives us the confidence to make challenging decisions which can from time to time contradict short-term market trends.

We would be the first to concede that investing through cycles is more easily said than done, especially when performance is tough. Still, we take comfort in knowing that companies are not static bodies; together management and financial resources can shift strategy and operations to deal with and manage the external environment and the challenges it presents.

Experian is a perfect example of this; the company primarily manages large databases that enable credit granting and monitoring to help minimise fraud and manage credit risk for banks, lenders, and corporates. Management decisions and strategy have helped to ensure Brazilian sales remain stable despite the difficult macroeconomic environment and increasing pricing pressure from local customers. In addition, strong competition in the US market has been successfully countered by a combination of new product releases and the provision of free services leaving them well positioned to grow this business in the coming years.

Commodity-related companies such as Wood Group have also made good progress adjusting to the harsher natural resources environment. A focus on lowering operating costs, increasing efficiency, pursuing bolt-on acquisitions and building closer relationships with customers show that, while the external environment may be completely out of management’s control, they are making the decisions required to adapt to near-term cyclical pressures and ultimately put themselves in a stronger position for the long term.

So we will continue to intensively check the quality of our investments. But we will also remember that, while all businesses go through cycles, those with strong management and robust balance sheets, trading at attractive valuations, will prove to be excellent investments – if we give them the time.

In my experience, the best investment decisions rarely leave you feeling warm and cosy. It would be easy to head towards perceived safety; to own the things that have already done well in the short to medium term. But managing in the rear view mirror is no way to go.

For our investors to prosper in 2016 and beyond, we will need to retain conviction in those holdings that have proved difficult over the recent past, but which present genuinely attractive opportunities in the long-term.

Find out more HERE about Aberdeen Investment Trusts