Equities are likely to be the strongest performing asset class next year as global central banks continue to pursue growth and higher inflation, according to JPMorgan Asset Management.
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