Rowan Dartington’s Stephens: Expect a Rocky New Year
Guy Stephens (pictured), managing director of Rowan Dartington Signature discusses why 2015 will not be a year for faint-hearted investors.
Another week and another roller coaster ride has come and almost gone. Last Tuesday the FTSE-100 touched 6,158 twice intraday but is now 7% higher at the time of writing. October saw something very similar but the sell-off and recovery spanned 2 months. This time, it is looking like no more than three weeks between peak, trough and peak. The US market is actually threatening to move into new territory and appears oblivious once more to the latest concerns that caused the sell-off.
In October, it was all about a slowdown in German GDP, a threat of recession, deflation in Europe and a global slowdown. That worry has now retreated as Germany narrowly avoided recession in Q3 and Mario Draghi reiterated soothing words and appears to be ever more likely to deliver Quantitative Easing in 2015, although we doubt this will make much difference without economic and welfare reform.
This time it is all about the falling oil price and the effect this will have on exporting countries and the industry itself, not to mention exposed banks in Canada and Russia which could lead to another credit default crisis as many indebted exploration businesses fail and there has been a run on the Rouble. There is also the possibility of a Greek election if the parliament does not elect a new President by 29th December which could signal the end of their membership of the Euro if the extreme left wing Syriza party is elected. These concerns now appear to have been replaced by the boost to consumer spending which will result from falling fuel prices and as over 75% of Western economies depend on consumer spending, the bulls are now back in charge and the Santa rally is back on.
However, if the 29th December does trigger a Greek election, then we will undoubtedly suffer another sell-off as the threat of a Euro exit emerges once more. In addition to this, Janet Yellen, the FED Chair, has signalled that a rise in US interest rates may come as soon as the second quarter of 2015 due to the strength of the economy, but the markets have taken this in their stride seeing it as a good move to prevent overheating. With all this volatility and flipping from one worry to another, it is quite possible that we will see a sell-off on this issue in the New Year as today’s irrelevance turns into tomorrow’s crisis.
Investors continue to buy the dips as there really is only one asset class to buy whilst the US economy continues to strengthen. Equities are not particularly cheap but they are not as expensive as they might be, bearing in mind the other major asset classes look relatively unattractive and there is a lot of cash looking for a home. The outlooks for 2015 so far are almost identical to 2014 with projections of high single digit returns from equities as interest rates rise. Most investors were too bearish on fixed interest in 2014 but the opportunity cost was limited if the allocation was put in equities, especially overseas. Next year really does look like we will see the first rise in UK and US interest rates and the rapid recovery in equities from recent sell-offs suggests there is significant support for them. However, we should also expect volatility as the marginal investor trades in and out looking to benefit from the latest scare which then subsides. Not a market for the faint-hearted but good returns should still be available if the investor can cope with the rocky ride.