Quarterly Market Overview – January 2015

“….we don’t know the ‘unknown unknowns’ but we do feel more optimistic than we did at the start of 2014…”

Looking back twelve months we expected returns to be lower than 2013, and volatility to continue. We also added a caveat that ‘unknown unknowns’ could impact on returns.

Some big events in 2014 included the Russian annexation of Crimea, and the continued political posturing over the Ukraine. ISIS and the global terror threats have generated many headlines and the impact of this remains unknown. Ebola, largely isolated to Africa, remains a global threat with the first case reported in the UK.

Globally China continues to slow whereas the US continues to grow strongly. Closer to home there were worries that Europe would slip into deflation and in the UK the Scottish Referendum caused short term volatility in the markets.

The big ‘unknown unknowns’ was the 50% fall in the price of oil. No-one could have foreseen that at the start of the year and it caused the markets to fall towards the end of the year as they feared it would slow global growth.

With no annual Santa Rally, and January starting subdued the question is whether there are any reasons to be cheerful especially if we consider that many of the concerns in 2014 remain. I am ever the pessimist and I think there are things in place which weren’t there in 2014, and dare I say it I might be moving towards being optimistic!

The strength of the dollar and the weakness of the Euro and Yen will help Japanese and European exporters. The fall in the oil price will help oil importers which covers developed and emerging markets. In emerging markets it reduces manufacturing costs and the costs of delivering goods. And finally Europe has fallen into deflation and this is likely to make the Central Bank deliver some form of QE.

Speaking to fund managers, and economists the views are mixed and some don’t share this optimism. What they do agree on is that the markets are likely to remain volatile. However, assuming another ‘unknown unknowns’ doesn’t happen then we believe these factors could deliver stronger returns than 2014 but we believe these will be closer to 5 to 8% which is expected going forward.

In this update we will highlight some of the key macro themes which have come out of recent meetings.


Some good news for those holding cash, inflation is 0.5%. At the start of the year inflation was 2.50% effectively delivering negative returns on cash. A quick look at the top one year ISA rates and savers can expect around 1.5% interest on a one year fixed account (1% above inflation).

M&S recently announced an interest rate of 6% p.a. but it is only linked to regular savings up to £250 per month and only for 12 months. No withdrawals can be made during this period. TSB are offering 5% but only for customers and to a maximum of £2,000. Even the new pensioner bonds, which are offering up to 4.0%, restrict the amount that can be invested.

Clearly to make the most of cash, investors must approach this in the same way as investing; spreading cash across a number of institutions to get the best rest. They must also expect money to be locked in for longer.

The challenger banks seem to be the best place to go for the strongest rates. Expectations on interest rates remain for rises to start towards the end of 2015 and for this to be slow incremental increases. In fact some estimate the rise will be to 0.60% rather than the previously predicted figure of 0.75%. It is clear that any rise will have little impact on saving rates.

Therefore the view remains that investors seeking income, or growth, from cash based investments may need to take on more risk to get the returns they are looking for.


Below we will look around the globe and provide an overview of the key messages coming out from fund managers.


Both in 2013 and 2014 the US was one of the strongest regions and the general consensus remains positive for the area. The S&P 500 broke several record highs throughout the year.

But realistically the earnings momentum which has driven the markets over the last couple of years cannot continue and it is expected that this will slow.

Unlike other economies the US remains in a strong place. Employment figures continue to improve with 240,000 new hires per month in 2014 and rising. The fall in oil prices is good news for the consumer and is likely to result in additional consumer spending. And importantly inflation is under control.

GDP growth is expected to continue upwards and in this environment rates are predicted to rise at some point during 2015. However, the policy of when and by how much will remain super loose and much will depend on wage growth.

In conclusion what we are likely to see in 2015 is a widening gap between the good economies and the bad ones. The US is one of the good ones. Although we shouldn’t expect the same returns as we have seen in the last couple of years the general view is that it can continue to deliver positive numbers even in a rising interest rate environment.

Interest rates are expected to increase and eyes will be focused on wage growth which currently remains fairly benign.

Europe and UK

Europe is an interesting market. There remains a number of challenges which need to be carefully monitored throughout the year. These include (but are not exhaustive):

  1. Poor Performers – France and Italy remain poor performers and much needs to change. If we take France as an example, it could be much stronger if it embarked on reforms to free up the labour market and cut red tape. However, politicians in France have little appetite for embarking on reforms of this nature.
  2. Germany – Germany is the powerhouse of Europe however there are signs that all is not well, and the weakness in the economy is a worry. Part of the slowdown has been driven by tensions in Russia due to their reliance on Eastern Europe for growth and also the slowdown in China has had a marked impact. What Germany needs to show is its ability to rebalance its economy and stimulate within its own borders and within the Eurozone. It also needs to invest in its declining infrastructure. None of this is easy but we shouldn’t underestimate their ability to respond to these challenges.
  3. Political pressures – Far Left and Far Right parties across Europe including Spain, France, Greece and the UK are making headway and could have an impact on governments. Although the feeling is that this may cause some bumpy moments it shouldn’t derail the recovery.

This list is not exhaustive but highlights some of the headlines – some analysts believe that Europe could surprise on the upside and they have good reason for thinking this.

There are several factors in play that weren’t in play at the start of 2014. Now that Europe has dropped into deflation it is likely we will see some form of QE coming into play, the weaker euro is good news for exporters as is the lower oil price which also benefits consumers and we are starting to see modest but positive credit growth.

Countries like Spain have made a strong recovery and it will be interesting to see if they can build on that momentum. The challenge for Spain will be any change in political direction.

In conclusion Europe still faces a number of challenges, apart from those listed unemployment is high across many countries and it is very indebted. However, there are factors in play which could help Europe surprise on the upside especially with the weakened Euro and the lower oil prices making companies more competitive.

Turning to the UK, 2014 was disappointing with negative performance from the FTSE and shares now close to their long term average. However, the general consensus is that the UK is in a good place (albeit behind the US).

The expectation is for modest growth in 2015, subdued inflation and the potential for rates to increase towards the end of the year but not significantly. For rates to increase the measure to watch is any signs of real wage growth.

Like Europe the UK will benefit from lower oil prices both in manufacturing and consumer confidence. However, the fall does mean lower revenues from the North Sea and what we gain may be lost. This is something we need to watch carefully.

There are also concerns of any slowdown in Europe and how that might impact on the UK’s continued recovery.

The big challenge for the UK is the election, it is unlikely that any change in party will derail the recovery because macro policies rarely change between parties. The change will be more noticeable on the ground and within certain businesses, this will be an area to monitor.

A re-election of the Conservatives (and any coalition party) will see the country given the choice to remain in Europe, or not; this will create further uncertainty. However, the most likely scenario seems to be some form of coalition, some have muted a Labour / Liberal Democrat / SNP Coalition. If this is the case there could be more calls for greater powers to be devolved to countries with the UK.

Much of this speculation and political posturing but we should expect volatility in the build to the election and afterwards. Most people agree that once the dust has settled it will be very much business as usual!

In summary the UK remains a good performer in the global spectrum. We should expect interest rates to rise towards the end of the year but this will be subject to real wage growth coming through. If it doesn’t then interest rates will remain as they are. The guessing game on how much they will go up is happening and it appears that increases will be small.

Lower oil prices are good for the consumer and manufacturers but it may put pressure on government revenue. The big question is around politics and anyone can guess how that will play out.

Asian, Frontier and Emerging Markets

We remain of the view that careful stock picking is required in Emerging, Frontier and Asian Markets.

The fall in the oil is not bad news for everyone. For the big exporters (Qatar, UAE and Russia) it is not good news and even Colombia and Mexico have a small negative position. However, importers of oil like Thailand, Taiwan, Korea and India will benefit from this.

Lower oil prices will mean different things for different economies but for those needing energy to power manufacturing and transport goods to the developed markets it is good news. It also gives these economies the ability to cut deficits, limit inflation and where they are subsidising fuel and fertiliser the ability to lower fiscal deficits.

The increase in interest rates in the US is not always good news for emerging markets however in 1999 and 2004 emerging markets responded positively to increasing interest rates so it points to selective regions doing well.

Areas where the general view is that growth will continue include Thailand, Turkey and India (India remains a bright spot for many). With Brazil, China and Russia continuing to slow.

It shouldn’t be ignored that economies like China, India, Indonesia, Mexico and South Korea have either announced or embarked on significant reforms. All of these differ in details but are generally aimed at sweeping away beurcratic barriers to economic growth, encouraging entrepreneurship and exposing inefficient industries to market discipline. Most are also looking to rebalance economic activity away from export and investment heavy models to become more oriented toward consumer demand.

China remains one to watch, it seems happy to allow its currency to strengthen for now – the question is whether it will remain happy to continue to do so as the economy slows. In the past they have been happy to stand firm but that was during a growth environment. If they do depreciate their currency then this could have a negative impact across the region. The shadow banking sector also remains a question mark as does the housing market.

On the plus side new economy companies (gaming and ecommerce) continue to generate strong growth as China’s internet giants are becoming increasingly more dominant.

In summary across the Asia, Emerging and Frontier Markets the picture is varied. An increase in interest rates is not necessarily bad news for all countries and the fall in oil prices will benefit many. Russia remains challenged and it is likely the Ukraine will be the least of their concerns as it battles falling revenues. China is one to watch and the worry will be if they take measures to weaken the currency.


Japan disappointed investors in 2014, many will consider 2013 as yet another false dawn.

However, there are many reasons to be optimistic. Abe surprised the market by calling a snap election which he won with a super majority and has another four years to carry out his reforms.

The Yen has depreciated further and the general expectations are that it will fall further. This will help exporters, which in turn should feedback into wage growth and domestic consumption.

Another big change in Japan is the investment strategy of the Government Pension Fund which has reduced its bond portfolio and increased its allocation to both domestic and global equities. This is important because for too long the Japanese market has been controlled by overseas investors and the shift needs to swing towards domestic investors. This will take time but it is a step in the right direction.

Two other key things that are happening are that QE is continuing at an unprecedented pace (currently 70% of GDP) and inflation has started to come into play (which they need to ensure stays and grows).

Although 2014 was disappointing investors shouldn’t discount Japan and clearly a lot is still happening. The depreciation of the Yen will mean that investors will need to have a hedge to make the most of returns going forward.


Trying to predict the future is madness, going into 2014 we were afraid when most were exuberant. We were right to be nervous and many things happened which we could never have predicted. Many of those are still here.

In 2015 many seem nervous and they are right to do so – Russia and Ukraine, European deflation, Ebola, ISIS, China, failing Oil prices etc etc.

However, Russia has more worrying issues at home and the crisis with the Ukraine could just melt away, European deflation could be good news (some form of QE), Ebola may be contained, China may not slow as much as expected and Oil may benefit more than it doesn’t.

Of course we don’t know the ‘unknown unknowns’ but we do feel more optimistic than we did at the start of 2014. The markets will be volatile at times but we feel a lot of the fear is already priced into the markets and even a slight positive will be good for the markets.

The general view remains that equity assets should produce 5 to 8% p.a. going forward and all things being equal if we can achieve that in 2015 we believe that will be good.

NOTE: This is written in a personal capacity and reflects the view of the author. The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog and the reader should accept that by its very nature many of the points are subjective and opinions of the author. This is not a recommendation to buy any product or service including any share or fund mentioned. Individuals wishing to buy any product or service as a result of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.

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