Potential turbulence regarding the strength of the US dollar is JP Morgan Asset Management’s chief market strategist for Europe Stephanie Flanders’ biggest concern in 2015.
Flanders says the dollar’s move higher on the back of expectations for higher US interest rates and the strong US economy will actually help Europe and Japan. However she adds that it is not reflective of the US “becoming the only game in town”.
Another concern for Flanders for next year is that the growing divergence between the global economies will continue and may actually drive market instability.
She says: “If we look back at the beginning of this year, we were coming off a long rally in equities built on an only partially fulfilled expectation that global GDP growth would recover. With the exception of the US and the UK, we haven’t seen global economies make good on those expectations; that may be a cause for nerves.
“The stage is set for diverging monetary policy next year. The US Federal Reserve will be the central player. Investors on balance are expecting to finally see somewhat of a rise in long-term interest rates (which didn’t materialise as expected in 2014), perhaps in conjunction with the first rate rise in the second half of the year.”
Meanwhile Flanders says that the dramatic fall in oil prices and ensuing instability has to raise some questions about geopolitical risks.
“I think the key risk is not so much around Russia or the Middle East, but in Europe where there is a simmering discontent with mainstream parties that may translate into genuinely anti-euro sentiment.”
In this environment Flanders says that a preference for buying equities and other risk assets makes sense as central banks remain the dominant forces shaping global financial markets.
She adds that equity prices still look reasonable by historical standards and in absolute terms and also look attractive relative to inflation and interest rates.
“The fundamental rule in investing that has applied over the past five years still applies to the investment environment as we enter 2015: when cash pays you nothing it is time to get invested in something. The bottom line is that this is still a world that rewards risk takers.”