What are some of the potential opportunities for 2015?
I believe you should this exercise no matter the time of the year, but in the beginning of the New Year you read and hear a lot of suggestions, and investors tend to pay enough attention to this, so it is better to stay watchful (“as goes January goes the year“?). Keep in mind that no matter the opinions or recommendations on whatever topic, if the market reveals itself contrary to what you previously thought you should abandon that initial idea, and even consider investing on the exact opposite direction, if you find it justifiable. In either case, you should expect surprises. In the beginning of 2014 many analysts spoke about Europe’s 2014 outperformance relative to the US and DAX performance was +2,7%, where S&P500 +13%. The predictions regarding bond assets and the real results were distinct as well. Also, there has been a tendency in recent years to be overoptimistic regarding economic forecasts – the following HSBC data relates to the (downward) evolution of the revision of growth estimates as the original estimated horizon gets closer:
Up to this date, however, things are going more or less the way they were predicted – with the main event being the positive outcome in European stocks and bonds (EuroStoxx 600 got up by 7,2% and EuroBonds 2,5% in January), after the announcement of Europe’s QE program. European stocks recorded the best January since 1989.
In this context, I gather here some of the potential situations that could occur in 2015, on a macro level:
- GDP growth for the world economy, according to the IMF:
- USA should keep its sustained economic growth, as well as its currency strength. This growth should be joined by a drop in unemployment, as well as a change on the rhythm of growth in wages. There is an inverse relationship between the rate of unemployment and the wage rate of growth (Source: BlackRock)
The US consumer continues to have a central role on the growth of the economy, benefiting from an increase in disposable income derived from shareholders gains and the appreciation of the real estate market. In addition, the costs of households’ debt service have been declining (Source: HSBC), thus having more income available for consumption.
The quality of the labor market, which will be an important factor to the Federal Reserve [a new indicator that could be important to investors is the LMCI (Labor Market Conditions Index)];
The industrial sector should benefit from lower energy costs, which will be beneficial for productivity;
The Federal Reserve should start increasing interest rates in 2015 and this is one of the risks to the markets in the event of a higher pace of rise than what is expected – even though the message sent was to “be patient” in the recovery process to the normal. There are differences on the prospects regarding the timing of this shift: some estimate the second quarter as the ‘kick-off’ to the rise in rates and others point out to the end of the year. In any case, the form and the pace of reduction of the policy by the Fed will be a risk factor to the US in 2015.
- The Euro zone and Japan should benefice from the fall in oil prices, its exchange rate depreciation and lower interest rates.
The consensus on the growth of the Euro zone is, however, on a more moderate level when compared to the US – the y axis represents the Real GDP against the highest point before the 2008 crisis (Source: UBS):
Contrary to the US, in Europe the consumer faces more adversities regarding either his tax level or his wage level. Still, it is expected that the fiscal side alleviates during 2015, effect that is not expected when it comes to wages – unemployment should remain in high levels (11,5% according to EuroStat).
It is also often mentioned a lack of coordination of interests between the various state members, where on one hand we have countries with a more rigorous, austere and reform-needed (in other countries) view, such as Germany and the Netherlands, and the most concerned countries with the absence of economic growth and tightening policies, such as France, Italy, or Greece…on the other. Personally I am more optimistic regarding this aspect and believe that this should not be a big as a problem as it is mentioned, and could eventually surprise the markets which seem to be already loaded with this assumption (my perspective may also be biased because I live in Portugal, so I have been hearing this for too long), but the time that a more unified view could take to manifest isn’t straightforward to tell. I just hope that the view Europeans have about the European Union is beginning to change (Source: UBS):
On the – very – bright side for Europe, we have the QE program, with 60 billion euros of monthly purchases of government bonds until September 2016 – way above the expectations.
- China will continue to manage the transition to a consumption based economy and depend less on investment and exportation, with the possibility of using monetary policy.
- The performance in Emerging markets should be divergent, due to their different sensibility to the recent fall in oil prices, the growing strength of the US dollar and to future rise of US interest rates. The choice on economic policy should also have an impact.
- Healthy business sector, globally with low credit default levels and good expectations on companies’ results, due to the possibility of refinancing at lower interest rates, cut in raw material costs and energy costs.
On the reaction in financial markets:
- More search for risky assets, justifying the over-exposure to stocks in the portfolio, despite a lower attractiveness of the binomial risk-expected profitability when compared to 2014.
- More volatility – due to many recent events (fall in oil prices, ECB injection of money, etc) this is an often mentioned characteristic and should be treated with attention. We are already seeing it since October 2014 and even more since the beginning of December 2014 (just look at the VIX Index or at the Average True Range – I personally prefer this one – in S&P500, NASDAQ, DAX or CAC40). You know Mandelbrot’s work in volatility clustering, where “…large changes tend to be followed by large changes, of either sign, and small changes tend to be followed by small changes…”. Diversification and active management could be even more important in 2015, and it is another main prediction that is becoming reality very clearly this year!
- Decrease in yields in all asset classes. It may even be negative in some bond sub-classes, particularly those of lower credit risk or sectors subject to peculiar shocks (energy).
Finally, take note at the political agenda for 2015: