tocks look likely to be dominated by political risk
PREDICTING the year ahead in markets can be a fool’s game. Last December, fund managers' 2014 look-aheads heralded the start of a year in which Japan’s shock and awe Abenomics tactics would finally end its disinflationary misery, while the Eurozone would begin to turn a corner and see some decent growth and market returns. US stocks, on the other hand, would be hit hard by the Federal Reserve’s QE taper, which would also spell doom for the “fragile five” emerging markets of India, Brazil, Indonesia, Turkey and South Africa.
In actuality, Japan-watchers are now far more downbeat than at this time last year, and the Nikkei 225 has gained just 4.9 per cent year-to-date, compared to the S&P 500’s 8.6 per cent. None of the Eurozone’s leading stock benchmarks have risen much, with Germany’s Dax and France’s CAC 40 falling by 0.7 per cent and 5.24 per cent respectively year-to-date, and the Eurozone-linked FTSE 100 currently down almost 8 per cent over the same period. Apparently fragile India and Indonesia, meanwhile, have seen their main stock indices surge by around 31 and 18 per cent respectively in 2014.
With that huge proviso, everyone agrees that it’s a good idea to regularly revisit your portfolio allocations. And with the continuous stream of think pieces and market commentaries that emerge at this time of year, the time is as good as any. Here are a few themes that those in the market are talking about.
A NEW EMERGING MARKETS CRISIS?
Insofar as it’s at all sensible to group countries into a bracket like “emerging markets” (EMs), many fund managers are nervous. Two of the big EMs – Brazil and China – look set to have a worse 2015 than 2014. And Jason Hollands of Tilney Bestinvest even thinks the Chinese authorities may finally be forced to sharply devalue the yuan: “capital misallocation has created a severely disjointed economy, with overinvestment in infrastructure and property and overcapacity in export goods, which is driving margin compression.” No one saw Russia’s slow-burning financial collapse coming, meanwhile, and few expect a swift turnaround as long as oil prices stay low.
But the biggest danger for EM as a group, according to the Bank for International Settlements at least, is the ongoing strength of the dollar. It recently pointed out that EM borrowers have issued $2.6 trillion (£1.66 trillion) of international debt securities, of which three-quarters are dollar-denominated. With the dollar likely to strengthen, these securities will cost more to pay back, triggering a potential debt crisis.
US, UK AND EUROZONE
If it’s wise to avoid loading up on cheap EM stocks at the moment, which developed markets are likely to do well next year? It’s incredibly hard to avoid exposure to the US, but many regard the biggest equity market in the world as too expensive.
Laith Khalaf of Hargreaves Lansdown, for example, lists “expensive US shares” as one of his five key themes to watch in 2015. Stock-pickers may find some opportunities in US sectors linked to oil’s fall, but it’s difficult to see the main indices rising by anything close to double-digits in the next 12 months. Of course, this shouldn’t matter so much to longer-term index investors, and Khalaf likes the L&G US Index fund.
For the UK, fund managers are generally expecting a bout of uncertainty around the time of the general election in May. “We do worry that political mavericks could lead to instability that could potentially render this a political market,” wrote Mark Martin of Neptune recently. Pledges on energy and financial services could easily push these sectors down in 2015. Bank of America Merrill Lynch put itself down as “bearish” on UK stocks in its recent 2015 global asset allocation roundup – the Eurozone was the only other region it gave the same rating.
And the fates of UK and Eurozone markets are tied, to an extent, with many FTSE 100 companies’ revenues partly coming from the single currency bloc. In this respect, QE from the European Central Bank (ECB) could prove to be a bright spot. Hollands expects full-blown sovereign bond buying from ECB governor Mario Draghi & Co in 2015, linked to German fiscal relaxation. Wherever it’s been introduced in the past, QE has been a boon for asset prices, and few expect things to be different in the Eurozone this time, even if it’s not accompanied by a commensurate economic uplift. Khalaf recommends the TM Sanditon European Fund.