MARKET market REPORT
A YEAR OF CHANGE Dropping oil prices, failing European economies, Japan's quantitative easing experiment and global deflation: what will the investment landscape look like in the year ahead, asks Alexander Mangion.
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ast year was one of validation for the big equity market returns of 2013. We got that and more as robust growth in global corporate profits generated healthy returns for equities (in local currency terms) in most regions and across credit markets. Strong returns from government bonds were the main surprise as long-term yields across developed markets declined from already low levels. However, it feels like 2014 was a year of reprieve from our inevitable low-return future. Bond yields are likely unsustainably low, credit spreads are unlikely to narrow further, and equity market valuations, at least in the US, are stretched. The bar for generating returns is rising each year. 2015 looks to be a year when active investment choices will matter, especially given divergent central bank policies and differential growth rates across the globe. In particular, it should be a year that suits the use of actively managed, globally diversified, multi-asset strategies. In this lowreturn world, a wide source of opportunities and a nimble process will be crucial when navigating the investment landscape in the year ahead. Let's look at what I think are trends or waves that will each have a major impact in its own right but that when taken together will amount to a big change for the global economy. The main news of 2015 is the oil prices. These have fallen by more than half since June 2014. According to Goldman Sachs Group Inc, oil prices need to drop even further and stay there for the first half of 2015.
40 - Money / Issue 29
With OPEC resisting a production cut to stem the price slide, output reductions will come from US shale drillers, who are pumping at the fastest pace in three decades. Goldman Sachs also confirmed this. Excess storage and tanker capacity suggests the market can run a surplus longer than it has in the past, so oil at around $40 for six months will be needed to slow US producers, they said. Saudi Arabia keeps saying that it will not cut on production. Will pressure from other OPEC countries change this decision? That's the question all traders out there are asking themselves. Europe can be heading for a crisis at least as severe as the Grexit scare was in 2012 and for the resulting run-up in interest rates and a sovereign debt scare in the peripheral countries. After all these years of struggle, the structural flaws in the EMU's design remain, and now major economies like Italy and France are headed for trouble. In the very near future we will finally know the answer to the question "Is the euro a currency or an experiment?" The changes required to answer that question will be wrenching and horrifically expensive. There are no good answers, only difficult choices about who pays how much and to whom. The European Central Bank has for long been asking governments to implement the necessary restructuring. EU countries keep registering high deficits and most dangerously very high debts. A much-needed help to EU countries is the fall in oil prices. Euro-zone growth and disposable income is supported by a fall in the price of oil. As a net importer of energy, the fall in the oil price acts as a tax cut. Of course it will also push down inflation, but for the right reason.