2015 for the markets will be a divergent, volatile and fragile year. On the one hand, the Fed is expected to exit its expansionary monetary policy in the wake of stronger-than-expected US growth (with the first rate hike it could arrive in mid-2015). On the other hand, Europe and Japan will move in the opposite direction: the difficulties of the economy are causing central banks to further open the liquidity taps. However, the end result will still be in favor of the markets for now: traders expect the high tide of quantitative easing and low rates to continue to keep investors afloat.
Meanwhile, low oil prices could hold surprises for some still undervalued in terms of their contribution to growth. This, combined with the continuation of the accommodative conditions of monetary policy and financial markets, could support the gradual recovery of the economy in some of the most difficult areas. For UBS, for example, fears about global growth are overstated: economic growth will be slightly more sustained in the next two years "with no recession in any major area". The Swiss bank estimates an acceleration from 3,3% in 2014 to 3,5% in 2015 and 3,6% in 2016 while the dollar will greatly strengthen, so much so that, says UBS, even the Chinese renminbi will depreciate slightly against the greenback.
IS THIS TIME DIFFERENT?
ACTIONS AND REACTIONS
However, the “recovery will be uneven” and fragile with “bouts of volatility”. The main risk, especially in the Eurozone, remains low inflation: "almost everywhere - writes the economist Andrew Cates in the latest outlook of ubs “The world by the numbers” – inflation rates continue to fall. Even in high-growth developed and emerging economies (such as the US, UK and China) inflationary pressures are decreasing. However, the main fears concern Europe”, where, notes UBS, “deflation will be narrowly avoided but where investors are right to be concerned – the Eurozone is one step away from both recession and inflation”. Not only. If the low oil price helps the recovery, such a rapid fall is not without side effects.
“The speed with which the oil price is falling – he warns Claudio Barberis, head of asset allocation MoneyFarm.com, independent Italian company of online consulting and asset management – will bring with it a large number of beneficiaries and victims: the latter are already starting to see each other and their agony risks creating a contagion effect on international markets”. On the other hand, Barberis continues quoting two well-known economists (Reinhart and Rogoff), “the words This time is different (this time it's different) are the four most dangerous words in the markets: they were spoken by investors in the technology sector in the late 90s to say that high valuations were sustainable”.
And then the real estate owners also pronounced them in 2007 to judge the high prices achieved by American homes. And now it's the turn of the shares. “The same thing – says Barberis – is being said by many investors who, faced with yields slightly above zero for bonds, argue that deflation, low growth, quantitative easing and a thousand other “structural” reasons will guarantee zero rates for many years, low volatility and high financial asset prices. Think this context it's normal it has in many respects the same meaning as saying This time is different".
On the markets, therefore, we have a year to manage with prudence after 2014, in the wake of 2013, experienced rising stock markets and bonds and a low price for risk in many markets. Indeed, after years of rallying on the markets, some investors are wondering how long this positive and non-volatile climate can last. In light of the longest bull market in 50 years, Russell's strategists for example do not see an imminent change of direction but warn: “The stock bull market is approaching maturity and starting to show signs of unpredictability and irrationality. Our processes and models still favor equities moderately over bonds, but a looming Fed tightening and diverging trends in global growth could uncover new challenges.
VOLATILITY RHYMES WITH OPPORTUNITY
CHOOSING THE RIGHT COMPASS
On the other hand, you know, no volatility, no party. The continuous and uniform growth of the markets reduces the room for manoeuvre. Conversely, shocks create investment opportunities. “The feeling – explains Paolo Longeri of the Research Department of 2015 Consultinvest Sgr – is that the change in direction of US monetary policy will determine a phase of adjustment on the markets, producing a reduction in global liquidity which will lead to an increase in volatility. Against this we will have an increase in the number and frequency of interesting investment opportunities that are increasingly rare given the high valuations achieved today”. For Consultinvest Sgr, moments of volatility create opportunities to gradually increase equity exposure while maintaining a moderate currency diversification in favor of the US dollar. “Investments – says Longeri – will focus on favoring corrections to primarily increase positions in the USA and subsequently, with medium-term call options, in the Eurozone”. The approach, let it be clear, is linked to prudence: the valuations of the equity and bond markets are overall high.
State Street notes that "although there are still opportunities, investing in equities could be risky in 2015 due to the potential for increased volatility" and that "investors need to ensure adequate protection for their portfolios". However, "economic often does not imply value e expensive may not mean overrated”. In this framework, it becomes important to find ways to balance risks and returns effectively. In the compass developed by State Street there are five investment themes to keep in mind, summarized below:
1. Find the right balance, and implement the right risk protection, to benefit from 2015 upsides and hedge against volatility.
2. Prepare for a double-speed pace: While the US market looks suitably priced, near-term momentum continues to favor dollar-denominated assets, and even modest earnings increases will be supportive for US equity prices. At the same time, at current valuations, European markets offer an attractive entry point for long-term investors looking for more upside potential should the earnings recovery materialise.
3. Keep an eye on the reforms of emerging countries: we need to understand who implements the reforms and how they can boost competitiveness and profit potential.
4. Rate differentials due to different central bank monetary policies will continue to offer opportunities for fixed income
5. The macroeconomic situation is not the market. Europe's structural problems are numerous and well known. But the ECB is in the field. There are pockets of value in Europe and the challenge is to find them. Investors therefore need to separate the macro picture from the market and trade selectively.
EUROSTOXX TO THE RESCUE
THE FED ACTS, STAY AWAY FROM MID AND SMALL CAP
Even Socgen's analysts are generally confident in the Old Continent. On the contrary. For the French investment house, 2015 should be the year in which the EuroStoxx50 will finally do better than the "unbeatable" S&P500, which should be affected by the first interest rate hike in almost a decade. “If 2014 was a 'lost' year for the Eurozone stock market – note the French analysts – 2015 should be a 'vintage wine'. In other words, experts expect to see the fruits of a series of changes underway: Quantitative easing from the ECB, Junker's infrastructure investment plan, the implementation of reforms in France, the weakening of the euro and finally the fall in the price of oil. Which will have positive impacts not only on the macro picture but also on the body world more generally.
“Companies – explains Socgen – should directly benefit from lower production and transport costs and increase margins. However, the Oil&Gas sector will be penalized and for this reason we have cut our rating to underweight”. Among the analysts' favorite sectors is the banking sector (overweight) after a flat and volatile 2014. “Banks have strengthened their balance sheets – they explain – and this should now allow them to open the door to a new policy close to shareholders including a cash dividend and/or new investments (M&A)”. Socgen then suggests staying away from small and mid caps at least until the Fed is on track to raise interest rates. "In the last 15 years the correlation between global small and mid caps and US interest rates has been 97%, it will be practically impossible for European SMEs not to be affected by the US tightening on the cost of money".
Overall, Socgen focuses its investment strategies on five "calls": 1) the Eurostoxx is better than the Ftse 100; 2) Cac40 is better than Dax30: France will benefit from national reforms and the weakening of the euro more than Germany; 3) large caps are better than mid & small caps; 4) Eurozone banks trade at attractive levels and could implement shareholder friendly policies; 5) European pharmaceuticals are better than the US ones.
