10 investment trends for 2015
It's always interesting for investors to hear what they think the markets have in store for the following calendar year.
Well, Goldman Sachs is first out of the traps, spelling out the key macro themes and outlook for asset classes over the next 12 months.
A broadening recovery
Expect the shift to sustained above-trend growth in the US that took place this year to be maintained in 2015, says Goldman. And while the US remains 'the strongest anchor of the global recovery', Japan and the Euro area 'look a little better', certainly relative to weakness in mid-2014.
We think our view that Euro area growth may be set to improve a little is more controversial, even though that too is reflected in many forecasts.
While we also think there is a real downside risk scenario in the Euro area, we are not convinced that the market is adequately reflecting the prospect of improved US growth over the next few months.
Developed markets divergence lives on
Clearly, Japan and Europe will struggle to match the runaway US economy in 2015. A key question, however, remains whether the smaller open economies like the UK and Norway will copy the Federal Reserve and raise interest rates, or be held back by slow growth and low inflation in the eurozone.
In addition, political uncertainty may raise its head again, with elections in Portugal, the UK and Spain through the year.
The new oil order
Oil prices have plunged by $30 a barrel since the summer, which took even Goldman Sachs by surprise. But the bank believes there is scope for further downside surprises.
A material expansion in oil service capacity in recent years is likely to lead to 5-15% cost deflation across oil developments, and positive production surprises from Libya, Iraq and Iran could further reinforce an oversupplied market in the coming year.
That's important as oil is a key ingredient in all sorts of things including industrial metals. Further falls could hit copper and aluminium prices. But, of course, it does increase disposable income, which should have a positive impact on GDP growth in both developed and emerging markets.
Lowflation and the fight against it
Inflation trends have played a big role in markets in 2014, particularly the focus on falling Euro area inflation, and are likely to continue to do so in 2015. Despite some modest improvement in growth, disinflationary forces are likely to remain powerful.
Even in the US, where growth has been strongest, the very moderate rate of wage inflation supports our view that the labour market still has plenty of effective slack.
Those forces are even more powerful in much of Europe. Declining oil prices are likely to reinforce the downward pressure on headline and - to a lesser extent - core inflation until well into 2015.
The dollar bull market
USD strength has been a feature of our views in 2014 and its continuation, particularly against G10, arguably remains our strongest asset market view looking through 2015, says Goldman. Euro weakness is a key element.
The bigger story is that we are in a multi-year phase of USD recovery, as the forces that drove the long period of USD weakness reverse, and that the market may be underestimating the scope and persistence of that trend. Relative to a long historical perspective, the USD strength so far looks modest.
FeD: Later, steeper, further, calmer
A benign inflation outlook and the risk of moving too early on rates has suggested the first hike in US borrowing costs would come relatively late, perhaps next September. But once it begins, policymakers may move faster than the market now expects.
In the run-up to tightening in 2003-04, the initial market repricing did not occur until the first hike was relatively close at hand. And once the tightening cycle began, the market systematically underestimated the hikes that would be delivered. In that case, many of the highest risk-reward opportunities to express the view began only once the Fed was already in motion.
There may be an element of that in this cycle too, which counsels for keeping some powder dry for that point. But, given the recent rally, this means that the opportunities look better than at the start of 2014, even as a bruised investor base seems less willing to pursue them.
China’s bumpy downshift continues
Goldman still thinks China will deliver GDP growth of between 6% and 7% over the next couple of years, but admits that a sharper slowing would make the medium-term challenges more difficult to manage.
This does suggest that the upside in China-linked assets is somewhat capped in the coming year, and the best opportunities to express positive market views are likely to come when investors move towards extreme pessimism such as earlier this year or in the summer of 2013.
Emerging markets: more relief, more polarisation
Emerging markets do, at least, seem in better health, with external imbalances improved in many, especially India, Thailand and Chile. Lower international food and oil prices means falling inflation, which is expected to drive emerging market local currency bonds 'to perform well'.
But 2015 will also see more polarisation between countries that have addressed their macroeconomic imbalances, and are on the right side of the oil import/export divide, and those that have not.
India is the clearest example of the former, and we expect to see Indian assets (equities, the Indian rupee, in addition to rates) trade well through the year, and Turkish equities and the Turkish lira should benefit from falling oil prices even though the external adjustment is not complete there. South Africa and Brazil are in the opposite camp.
The low vol world and its challenges
Low levels of volatility - particularly within equities - are not inappropriate, but largely reflect fundamental forces, argues Goldman.
Despite the periodic spikes in volatility, most notably in October, the VIX average for 2014 is the lowest of the recovery so far. We think this basic environment will persist into 2015.
Living in a low return world
Many of the major asset classes offer low absolute returns, but Goldman still thinks equity yields look better, especially in emerging markets.
Our market outlook overall is quite benign. But, under the surface, it is striking that many asset prices are priced to offer low absolute rates of return over the coming years.
Comparing expected real returns from a range of core assets, the earnings yield on equities (and on a vol adjusted basis, on parts of credit) still makes them more attractive than sovereign bonds on a relative basis. We also think we are in an environment where equity multiples are likely to stay above average and - even in the US - have the potential to move higher still.
So we do not see the valuation picture as one that incorporates a high risk of large falls in equity prices. But, even here, the upside may be less compelling than it has been, and our forecasts are for relatively modest nominal returns outside Japan and parts of EM.
Finally, of the major asset classes, it is striking that EM equities now trade with earnings yields that are above their long-run averages. That on its own is no reason to own them. But for the first time in a while, we find ourselves thinking that they offer at least the possibility of significantly higher returns than in DM over the medium term, even if they still offer significantly more risk.
This article was written for our sister website Money Observer
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
A catch-all phrase that can range from assessing the price of a property or vehicle before offering it for sale or the net worth of assets in an investment portfolio to the prices of shares on a stock exchange.
The general term for the rate of income from an investment expressed as an annual percentage and based on its current market value. For example, if a corporate bond or gilt originally sold at £100 par value with a coupon of 10% is bought for £100 then the coupon and the yield are the same at 10%, or £10. But if an investor buys the bond for £125, its coupon is still 10% (or £10) and the investor receives £10 but as the investor bought the bond for £125 (not £100) the yield on the investment is 8%.
The total money value of all the finished goods and services produced in an economy in one year. It includes all consumer and government consumption, government spending and borrowing, investments and exports (minus imports) and is taken as a guide to a nation’s economic health and financial well being. However, some economists feel GDP is inaccurate because it fails to measure the changes in a nation's standard of living, unpaid labour, savings and inflationary price changes (such as housing booms and stockmarket increases).
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).
This is the opposite of inflation and refers to a decrease in the price of goods, services and raw materials. Economically, deflation is bad news: the only major period of deflation happened in the 1920s and 1930s in the Great Depression. Not to be confused with disinflation, which is a slowing down in the rate of price increases. When governments raise interest rates to reduce inflation this is often (wrongly) described as deflationary but is really an attempt to introduce an element of disinflation.
Generic, loosely-defined term for markets in a newly industrialised or Third World country that is in the process of moving from a closed economy to an open market economy while building accountability within the system. The World Bank recognises 28 countries as emerging markets, including Argentina, Brazil, China, Czech Republic, Egypt, India, Israel, Morocco, Russia and Venezuela. Because these countries carry additional political, economic and currency risks, investors in emerging markets should accept volatile returns. There is potential to make large profit at the risk of large losses.
A bull market describes a market where the prevailing trend is upward moving or “bullish”. This is a prolonged period in which investment prices rise faster than their historical average. Bull markets are characterised by optimism, investor confidence and expectations that strong results will continue. Bull markets can happen as a result of an economic recovery, an economic boom, or investor irrationality. It is the opposite of a bear market.