2015 will reward risk takers, says JPMorgan
In its fourth-quarter 'Worldview' publication, JPMorgan argues that global central bank actions will continue to drive market returns in 2015.
Stephanie Flanders, chief market strategist for UK and Europe at JPMorgan, says: 'Both the US Federal Reserve and the Bank of England will likely raise rates in 2015 as their recoveries mature, while feeble growth and the risk of deflation will continue to threaten Japan and Europe.
"There are both risks and advantages to this divergence but, for investors, it will have three implications: a stronger US dollar, continued weakness in global commodity prices, and looser monetary conditions globally than previously expected."
Flanders describes the strength of the US dollar as "a win-win situation for the global economy" if appreciation remains "orderly", as it should both help to sustain the US recovery and boost exporters in Europe and Japan, where growth is needed.
Tai Hui, chief market strategist for Asia at JPMorgan, also argues that a stronger dollar may not be negative for emerging markets, as in previous cases. "If a stronger US currency attracts international capital to dollar assets, investors will worry about the impact on emerging market performance," he says.
"However, emerging markets' stronger foreign currency reserve positions and greater exchange rate flexibility leave them better poised than in past cycles, suggesting they can avert any currency crisis."
On an asset level, a stronger dollar and rising interest rates are likely to make equities more attractive than fixed-income assets, particularly in the US.
"The path to normalisation in 2015 will begin in earnest with an interest rate rise in the US, likely mid next year. However, the Fed may ultimately want to ensure long-term rates stay above short-term rates, implying negative total returns for all treasuries with maturities of two years and above.
US to lead the way
"Consequently, 2015 should be a year to be underweight treasuries and short duration in US corporate bonds, although bond markets outside the US may fare better," says David Kelly, chief global strategist at JP Morgan.
Within equities, Kelly believes the US will continue to "lead the way", predicting that US company earnings will grow at a "mid-single digit pace" in 2015. Currently, the US is the only region to boast earnings growth above 2008 levels while Europe, Japan and emerging markets continue to lag their pre-crisis growth.
Kelly adds that that the economic picture is "less clear cut" for emerging market equities, which remain hindered by the gradual slowing of Chinese growth, weakness among commodity producers and the potential impact of higher US interest rates.
However, he argues that, given a faster pace of economic growth, emerging market earnings should have strong long-term growth potential.
"The fundamental rule in investing that has applied over the past five years still applies to the investment environment as we enter 2015: when cash pays you nothing it is time to get invested in something. The bottom line is that this is still a world that rewards risk takers," says Kelly.
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).
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).
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.
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.