As 2014 ended and 2015 started it seemed that the impressive mix of corporate earnings, surprisingly good news on economic growth in certain countries and pleasing comments from a wide variety of companies was being ignored. It seemed that all the encouraging news from the previous twelve months, as well as the solace investors could draw from the lack of any lasting reactions to any adverse news, was to be discarded whilst the focus was on the perceived issues stemming from the falls in the oil price and other industrial commodities.
The reaction to these price declines has dominated the early part of 2015 yet unless economic fundamentals are to continue to be wrongly perceived, we believe that these very important moves will have a beneficial impact on global growth and just as importantly, will have a beneficial impact on a wide array of stock markets and individual stocks. This offers us significant hope for a bright outlook for 2015.
With American economic growth showing itself to be very potent in 2014 and beginning to finally break free from the psychological and limiting economic constraints posed by the banking crisis of 2008 there has been a meaningful pick-up in the outlook for employment and spending, an event clearly discounted and recognised by a number of US stock market sectors. It’s obvious that after all the help from the Federal Reserve, the US economy has genuine traction at last. Of course, the need “to be careful what you wish for” holds true and the recent pronounced spike in consumer confidence following the halving of the price of oil holds an obvious threat to the very easy monetary conditions of recent years – conditions the stock market has clearly liked. The health in the wider economy does suggest that we will face a “normal” level of interest rates and at some stage this will begin to be discounted by investors.
Any rise in interest rates will pose a threat to the strong run of recent years but with valuations in the middle of their long-term averages, the financial system firmly shows signs of life re: new loans, leverage and capital spending all picking up, we believe the stock market will ultimately welcome a return to a “normal” level for interest rates.
In the UK, the same phenomenon is underway albeit with a lag by comparison to the strong run in the US in recent years, both in economic and stock market terms. However, with a consumer possibly energised by the fall in the price of petrol and the recent optimistic news on levels of overall employment, we anticipate a larger than expected rise in incomes and expenditure. When combined with a Consumer Price Index rate of increase which has just recorded a fourteen year low, the outlook for measures of “real” incomes is very strong. Whilst the Bank of England continues to remain supportive of the international efforts to reflate economies which are faced with deflation, the developments in the domestic economy will not escape the attention of the Monetary Policy Committee if these trends continue into the second half of the year.
Obviously the one factor which casts its shadow over the UK in the first half of 2015 is the forthcoming General Election. With a seemingly polarised electorate ensuring that no single party is likely to win an overall majority, widespread and pronounced differences exist in the proposed policies amongst all the major parties. With the wild card factor of the possible strong showing of at least one of the smaller political parties, there is every reason to believe that the MPC will keep a watching brief re: future actions until the colour and hue of the next Government has been settled.
We recently heard the phrase that “it is a world sponsored by central banks.” This is certainly a very apt and concise summary and nowhere is this more obvious than in mainland Europe at the moment. The European Central Bank (ECB) has been forced into concerted action over and above its recent policy initiatives to stimulate economic growth. Record low bond yields and currency developments would make it look like earlier monetary policies have already worked. However, there remains much to be done and the recently announced quantitative easing moves are clearly an attempt to lessen some of the structural economic rigidities in the European Union that still need to be overcome. In the meantime, boosted by the noticeable fall in the price of oil and aided by the monetary assistance given previously by the ECB it remains possible that economic growth may surprise on the upside.
We take the same view with a large number of international economies, chiefly that economic growth may surprise, not least in Japan and China. It is the latter which most intrigues us. Born of a punitive desire to reduce levels of fraud and corruption as well as slow down the vast amount spent on infrastructure in recent years, the Chinese government embarked on a clampdown on economic growth that has resulted in a seemingly desired outcome, not least in terms of lessening pressures on their own currency, and now they can begin to stimulate their economy again. Whilst the headlines would show that the Chinese stock market has behaved in an irresponsible, if not euphoric, way to the clear signalling by the Chinese authorities that they wish to see economic growth accelerate again, we take a more sanguine view of these negative headlines and believe a base is being built for future appealing returns in the Chinese market. We are looking for similar opportunities in additional markets which have been out of favour to the same extent.
With regard to attractive levels of sustainable income available from a whole host of high-quality bonds and bond funds during 2014, we expect a similar pattern for 2015. We were pleased with the high levels of income payments announced by a number of our core bond funds and believe we can look forward to a similar level of consistent income in 2015 with three key factors: inflation, volatility in fixed income markets and corporate defaults all at low levels in the developed world.
Whilst we remain wary of certain assets, notably the valuations for some types of Government debt, we are confident again for the outlook for 2015 on the whole. With the full scale implications of the ever present quantitative easing as difficult to gauge as always, there are currently no obvious signs of widespread euphoria in equities. We focus, as ever, on where we believe valuations are most generous and with our core holdings standing at appealing valuations we are pleased with the potential for 2015 and the promise of a year less disruptive than 2014. We believe as the more favourable aspects of recent economic developments play out in 2015 that new leaders will appear across all assets and valuations will begin to adjust accordingly.