Investment View December 2014 / January 2015
The last couple of weeks and indeed the last quarter of 2014 have been very jittery with markets significantly unsettled. The FTSE 100 achieved a peak for the year in September, when once again expectations rose that the 7,000 mark might be reached. Since then we have seen all markets become volatile and frequently over-reacting to news and selling off.
The meeting of OPEC at the end of November did nothing to support or bolster the price of oil. Since that meeting the oil price has fallen to levels last seen in 2009. Whilst this is good news for the consumer, markets view it as a sign of potentially weak global growth and have retreated quite sharply, albeit something of a Santa rally seems to be bubbling away and the oil price is now edging up. Indeed, it seems like a Santa sprint at the moment.
Markets re-rated through 2013 and for much of 2014 it felt as though markets constantly questioned the robustness of the re-rating. Corporate earnings often disappointed and economic data was often inconsistent and offered conflicting evidence. Markets would progress then stumble backwards and slowly recover. The US market performed strongly, the UK disappointed and should have done better on decent economic performance, bonds surprised many commentators who again purveyed endless messages of doom which proved misplaced. Property performed strongly, Europe lived with the shadow of recession and ECB chatter of support. Asia progressed and a new fund we introduced, Baillie Gifford Pacific, performed strongly. Overall global equities had a satisfactory year with the US the clear winner in developed markets. Emerging markets were led by very strong performance in India, which produced a tremendous performance. So 2014 will not, in our view, be seen as a golden year but neither was it traumatic and the significant market correction that many consistently thought was just around the corner never came. Undoubtedly value was harder for fund managers to find, but find it they did.
So as we look to 2015 what might we expect from markets?
Many challenges face the global economy, not least an uncertain Chinese growth outlook and the spectre of deflation in the Eurozone. The recent dramatic decline in the oil price could further support growth. By contrast, this time last year the emphasis was very much on monetary tightening as the US Federal Reserve prepared to taper its quantitative easing and markets fretted about UK interest rate rises. The market remains particularly pessimistic about Europe, where we should see additional stimulus measures in 2015, and Japan has bolstered its own unconventional monetary policy drive by extending QE. Global equities are likely to paint a mixed picture in 2015, with the extent of economic recovery diverging across regions. While fundamentals remain positive in the US which should help to drive global growth in 2015, uncertainty lingers in Europe, Japan and most of the emerging markets. The consensus view is that the modest level of global growth will persist into 2015, with the Eurozone the major culprit again. Indeed, the latter's structural problems remain unsolved, while sentiment in Germany has been more negative than expected as a result of the Russia/Ukraine conflict.
While fairly-valued, European stocks are still cheaper than their US counterparts, which is attractive in a world of relative, rather than absolute, bargains. With investor sentiment on Europe negative, there is potential for a sentiment bounce on better economic data and improving earnings.
Global equity income stocks with disciplined management, financial strength, resilient cash flows and long-term growth prospects occupy, in our view, an area between corporate bonds and equities. We believe this asset class can generate strong risk-adjusted returns under multiple scenarios, and will remain a compelling investment opportunity for the patient, long-term investor.
The US equity market performed well in 2014, with the S&P 500 breaking a number of record highs over the year. In an environment of improving economic growth, companies have been performing well and generating strong earnings growth. We are, however, starting to see earnings momentum slow as companies struggle to maintain levels of strong growth seen over the last couple of years. Market consensus still expects high double-digit earnings growth in 2015, which may be a challenge given a slower growth backdrop and pressure on margins. It is likely to be a very satisfactory year for the US but unlikely to achieve 2014 performance.
In the UK, having delivered a broadly flat performance in 2014, the aggregate valuation of the market has not changed significantly. The market expects low single digit earnings growth in 2015, which is slightly lower than had been anticipated a year ago. Earnings expectations have been scaled back during the course of 2014 and projections for global growth cut. In our view, the UK could be an area that pleasantly surprises markets in 2015, albeit an election and potential policy changes will impact markets, but hopefully in a positive way.
Emerging markets remain challenging and the earnings outlook for three of the four BRICs is negative. India is the only bright spot in our view: it has an exciting investment story, with exceptional demographics and a vibrant private sector. Although the economy and the market have both done well in 2014, we think they have further to go. Our strategy will be to continue with a wider Asian remit which secures some exposure to emerging markets.
For fixed income in 2015 much rests on the Eurozone’s impact on investment markets, and policymaker decisions on rate rises. Against the backdrop of a remarkable 2014 for the asset class, fixed income markets we expect to be both interesting and challenging in the year ahead with particular opportunities in corporate rising stars, and among the beneficiaries of lower oil prices, including selective emerging markets. We will continue to concentrate on strategic bond funds and high yield funds. High Yield bonds will continue to be a source of income in diversified portfolios and underlying default rates remain low. Volatility will create tactical opportunities, but as with this year it’s about yield not capital gains.
We expect that during 2015 commercial property will continue to offer investors very attractive returns as the lag between supply of properties and demand continues. It would be no surprise to see double digit returns for property funds over the year.
What is certain is that there will be plenty of surprises and let’s hope most are positive. We wish you a Happy Christmas and prosperous New Year.