2015 is shaping up to be quite a volatile year for financial markets. Oil prices plummeted to new lows after losing more than half of their value since June 2014.
Multi-year-low commodity prices, along with excess productive capacity and sluggish demand, have driven consumer inflation below zero in Europe, while political uncertainty has increased.
Despite this, we remain relatively constructive on global economic growth and asset prices. The US economy is expected to accelerate in 2015 as the unusually harsh winter seen in the first quarter of 2014 is unlikely to be repeated this year, while a strong job market is fuelling a consumer demand-driven expansion.
"The decline in oil prices should be a net benefit for the world economy"
Europe and Japan are also likely to post slightly stronger growth on the back of record-low borrowing costs and weaker currencies.
The main growth concern is China – the world’s second-largest economy – which we expect to decelerate somewhat. However, this shows the authorities in Beijing are focused on much-needed reforms to turn China from an export and investment-driven engine to one powered by domestic consumption. And that naturally represents a trade-off between short-term and long-term growth.
Meanwhile, the decline in oil prices should be a net benefit for the world economy – lower energy costs boost disposable income of households, increase corporate profits and keep inflation relatively benign.
Low inflation is allowing central banks to loosen monetary policy – more than a dozen have cut rates so far this year alone. Central bank action is helping to keep borrowing costs low for both consumers and companies.
"It is not going to be as easy a ride as the past six years, during which global stocks have more than doubled"
While loose monetary policies are helpful to investors in relatively riskier assets such as stocks and higher-yielding bonds – it is not going to be as easy a ride as the past six years, during which global stocks have more than doubled. Indeed, 2015 is likely to see traditional asset classes generate lower investment returns than in recent years.
Bond yields have already discounted a lot of disinflationary pressures, which means any upside surprise in terms of growth or inflation could undermine returns. Also, the first US Federal Reserve (Fed) rate hike of the cycle – expected sometime in the middle of the year – is normally associated with increased market volatility.
However, we do not think this is something to be too concerned about. The Fed is expected to raise rates only because the US economy has recovered significantly from the financial crisis of 2008-09. US employers hired more workers in 2014 than in any year since 1999.
Widen investment horizons
The good news is that the Fed looks keen to err on the side of caution. Therefore, any rise in interest rates is likely to be gradual and well-signalled.
Thus, we do not believe that we are near the end of the bull rally in stocks led by developed markets. History teaches us that equity markets usually rise well into a rate hiking cycle – usually until the Fed’s focus shifts from supporting growth to combating inflation. We believe this is likely to be a 2016, or even 2017, issue rather than a 2015 one.
However, lower returns and higher volatility will make investment gains feel much harder to achieve. Against this backdrop, we believe investors need to widen their investment horizons to areas less travelled.
"We would recommend investors consider complementing global equity investments with less traditional sources of returns"
A conventional approach would be to buy developed-market and select Asian stocks on dips in prices, a strategy we expect to remain profitable in 2015. Such an approach would also include investments in a basket of income-generating assets, such as high-dividend paying stocks and some Asian local currency bond markets, including China and India.
Finally, there are many alternative strategies that we believe will generate a good risk-return profile in 2015, relative to the more traditional asset classes. However, these would require professional investment advice.
Overall, we remain constructive on risk assets, despite the ongoing volatility and the likelihood of the Fed hiking interest rates for the first time since 2006. However, we would recommend investors consider complementing global equity investments with less traditional sources of returns.
A version of this article was first published in Singapore’s Business Times on 25 February 2015
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