As we leave 2014 behind, we ask the multi-manager experts which sectors and geographies they anticipate will potentially deliver the best returns in 2015 - and what are their biggest concerns for the next 12 months?
Gavin Counsell, multi asset fund manager, Aviva Investors
With the US economy showing robust growth, falling unemployment, and increasingly positive sentiment, North American equity is likely to provide solid returns over the next 12-to-18 months. But with valuations higher than two-to-three years ago, the scale of returns are likely to be moderated compared to recent experience. With the US less dependent on external trade compared with other regions, and with growing domestic confidence, the US is less exposed to potential slowdowns in other areas of the global economy.
The other regions that could produce some very interesting returns are Japan and Europe. However rather than being driven by robust fundamentals, the returns from these regions will be driven significantly by central bank policies and their efforts to stimulate the economy. The recent moves in the Japanese stock exchange on the back of the combined actions of the Bank of Japan to increase government bond purchases and Japan’s national pension fund scheme to increase its equity allocation have shown how dramatic the returns could be.
Europe has been the developed region that has lagged, and it is no coincidence that it is the region that is also the slowest to provide firm simulative actions. Given that low levels of inflation continue to worry and there are no signs of robust growth, it is likely to be a question of “when” not “if” the European Central Bank carries out quantitative easing. When they do, European equities – and other risk assets – should perform well.
The biggest concerns are linked to central policy error. Since the global financial crisis, central banks have been a key factor in asset price returns, with loose monetary policy providing much of the fuel. 2015 is expected to see some key divergences: US/UK areas raising rates; other areas needing to provide further stimulus. We have to remember we are in unprecedented times, and there could well be some more surprises.
Caspar Rock, chief investment officer, Architas
There are a number of factors we need to consider when weighing up the prospects for global asset classes during 2015. First, there remains a real tension in European equities; they are cheap if you believe that the banks have been fixed and that there will be a cyclical recovery in 2015. They therefore offer a potentially attractive entry point as you might expect equities to rally over the next 12 months.
In addition oil is currently trading at a very low level compared with recent pricing, which is extremely good news for economic growth. It was recently pointed out that if the oil price remains at around $80 per barrel it would add around 1 per cent to the GDP of India. While it is tricky to predict the future path of oil prices, the longer they stay low the better it will be for the global economy. One area in particular that would benefit from lower oil prices would be Asia.
Another area where things are looking more positive for 2015 is Japan. The view from those who have visited the country in recent weeks is that they have never seen CEOs as positive as they are right now. This in large part is due to the action Prime Minister Shinzo Abe is taking to push inflation. There is still the need for real structural reform in Japan but the feeling is that this will now finally happen, rather than just continue to be talked about. Companies are now also thinking about shareholder returns in a way that has not happened in recent years, which is very positive. Although with the continued weakness of the yen it is still worth considering hedging any investment in the country.
The biggest risk for global markets is that interest rates rise faster than expected. We still expect that any rate rises to be both small and incremental rather than anything more dramatic. But if interest rate rises started to get more aggressive this would create serious wobbles in the equity markets.
Peter Askew, co manager, T Bailey Growth Dynamic and Defensive funds
US equity markets stand at all-time highs after corporate earnings again beat forecasts in the third quarter, but continuing to outstrip expectations in this fashion may prove difficult. Many investors, particularly those of a contrarian mindset, will then be looking elsewhere for opportunities in 2015. As a rule of thumb in investment, it is sensible to look at asset classes where demand outstrips supply. In years ahead that approach is likely to favour global themes such as infrastructure, agriculture and water – the last two being strongly connected.
We also see investment opportunities in disruptive technologies, though identifying value will require a selective approach. Another theme, healthcare, has had a good 2014, albeit with some biotech-influenced turbulence in the first half of the year. Global demand for broader healthcare services looks likely to continue to grow as a consequence of ageing populations, not least in developing countries where levels of affluence are on the increase. On that basis we continue to see an opportunity in the global healthcare sector.
Another area where patience has paid off is Japan. Although it is unloved by many, it is the world’s third largest economy by nominal GDP, and Prime Minister Shinzo Abe and Bank of Japan Governor Haruhiko Kuroda have demonstrated an impressive determination to loosen the nation’s economic straitjacket.
In 2015 we may learn whether recent additional QE has triggered a longer-term cultural change in Japan. We are retaining our position and our faith. One concern though is the possibility of further yen weakness, ‘competitive devaluation’ at the expense of structural reform. This would further ratchet up regional tensions and act as a headwind for recovery in Europe, where high-end manufacturers would find themselves facing greater competition from cheaper Japanese exports.
Our view on Europe is that stocks are not cheap enough – yet. We may be starting to see some green shoots in the eurozone, but we are concerned about an ostrich-like mentality, particularly in Italy and France, where labour reforms are urgently needed.