My year-ahead predictions: Divergence will be a crucial theme
For the most part, 2014 has been volatile for global financial markets, with several key markets likely to record losses for the year. In the context of a recovering world economy, it has been disappointing. We predict more of the same next year, with the US and UK economies doing well, and emerging markets and much of Europe continuing to struggle.
KEY MOMENTS FROM 2014
Since January, overseas developed market stocks have returned 8 per cent in sterling terms – largely as a result of strong gains in the US and a weaker pound. Emerging markets, meanwhile, were basically flat this year. Investments in UK stocks have been even less rewarding, with a loss of about 4 per cent. The UK has been lacklustre for several reasons: expectations of an early rise in interest rates, the Scottish independence vote and upcoming general election, and recent sharp falls in commodity prices.
In contrast, UK government bonds delivered around 14 per cent – an incredible return in any year, let alone one in which the UK economy grew by 3 per cent. The weakness of Europe and Japan has pushed global interest rates down to levels that would be considered low even in the event that global growth had collapsed, which it hasn’t. High returns from government bonds has been the big surprise of 2014.
Gold has done little this year, and we think it lost its safe haven status back in early 2012. Investors continue to be big sellers, with holdings in ETFs falling back to 2009 levels. One gold fund popular with private investors has lost half of its value in just two years.
LOOKING FORWARD TO THE NEW YEAR
The outlook for 2015 is being shaped now. The oil price may have some way further to fall, but with long-term oil prices now close to levels seen during the worst of the financial crisis, the market is coming back to equilibrium. Absent a major unravelling of emerging markets, which we do not think will happen, the falling oil price is a big boost to global growth and developed stock markets in particular.
Next year could see a resurgence of the consumer in the US and the UK, with confidence high and unemployment declining. Inflation is likely to fall further, wages are on the up, and central banks are unlikely to spoil the party with much higher interest rates.
In the UK, rates are unlikely to rise until 2016. A mid-2015 US rate hike is on the cards, and it may prove a bumpy ride for investors, but the US economy is strong enough to withstand a small increase. We will see a divergence between developed economies where stimulus packages are no longer needed, and the likes of Japan, China and emerging markets, which are fragile and still require considerable support.
This could cause tremors in global stock markets. We think the dollar will grow stronger and commodity prices will fall. Emerging markets, many of which rely on commodities for growth, could face further difficulties. Other key areas we’ll be focused on in 2015 include the UK election, where the result could have a big impact on stocks, the growing tension in Greece, and the unresolved situation with Russia and Ukraine. Notwithstanding these risks, we think 2015 will be a rewarding year for investors, after a relatively disappointing 2014.
Shaun Port is chief investment officer at Nutmeg. www.nutmeg.com