2015: Year of tempered optimism
2015 is set to be a year of ‘tempered optimism’, according to Vision 2015, a new report on key trends and market developments for the year ahead from Investec Wealth & Investment (“IW&I”).
IW&I believes that significant progress has been made to repair the global economy in 2014 and this will help drive a more positive investment environment in 2015. In particular, the US is the one region of the world that has achieved a self-sustaining recovery, driven by cheap energy and technological innovation.
In Europe, the European Central Bank has become more aggressive with its monetary weapons, even if full-on Quantitative Easing (QE) is currently still locked in the armoury, while China has enough economic resilience and flexibility to not become the catalyst for a further downgrade in global growth. Finally, middle class consumers in emerging economies remain a growing constituency and will be for several years.
After a challenging end to 2014, with markets having previously been tested by events such as Russia’s annexation of Crimea and the Ebola crisis and more recently by a very weak oil price and a collapsing Russian ruble, the next 12 months will continue to be affected by volatility, warns IW&I – though for investors with a longer investment horizon, volatility should present little to fear.
John Wyn-Evans, head of Investment Strategy at Investec Wealth & Investment, said: “Looking forward to 2015, we remain constructive about the prospects for future returns. Central banks continue to ‘have our backs’ and will not risk any incipient recovery by raising rates too far or too fast. Equities can generate a return equivalent to their earnings growth plus the dividend – we just need that earnings growth to materialise. The US market has demonstrated what is achievable, delivering around 9% in 2014 so far2.
“The promise of better returns is beckoning, but there are several potential risks to keep us watchful, and expectations have been dulled by a difficult 2014. Any further threat to growth could easily tip Europe into deflation, for instance, which would throw into question the ability of consumers and even some governments to repay their debts.”
Deflation remains a challenge across a number of markets, adds IW&I, though is by no means the highest probability outcome, just one of many that needs to be considered. Indeed, IW&I notes that central banks are focused on creating more inflation. Unemployment rates in the US and UK are at levels where investors might expect wages to start rising, and there are tentative signs of this happening. A return to higher inflation in 2015 would change the investment landscape, creating a stampede out of conventional bonds and into index-linked ones.
John Wyn-Evans added: “Volatility is often portrayed as a malign force, and while it’s true that nobody likes to see their portfolio fall in value, the ability to ride through the market troughs frames one’s attitude towards them. For an investor with no leverage and a longer investment horizon, volatility should present little to fear, particularly if dividends and bond coupons keep flowing – these are historically the least volatile, and largest, component of investment returns.
“We believe that a traditional balanced portfolio of gilts and equities is pretty much condemned to unexciting – but still positive – returns from current valuations. One option in this environment is to take more risk not only by investing in more equities, but also by considering higher-yielding corporate bonds, real estate and infrastructure funds. The price to be paid for the higher return will be higher volatility, a factor that we shall have to get used to after several years of low volatility and limited market setbacks.”