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Q: What were the surprises of 2014?
We saw two remarkable trends last year: the sharp decline in oil prices and the decline in bond yields, both of which are connected. And while the decline in oil prices goes some way to explaining the declining bond yields, it is not the only factor as other elements such as lower inflation have also played a part.
We would also say that the relative outperformance of the US versus Europe has been surprising. With the S&P 500 up by around 24% in euro terms [at the time of writing] comparing with Euro Stoxx’s performance of around 2% last year, it is fair to say that the more-than-20% outperformance was higher than expected.
Q: What regions are you expecting to see the most growth this year?
In 2015, a key theme will continue to be the dichotomy of monetary policies between the US and Europe. In 2014, the US Federal Reserve employed tapering and they will probably raise rates in 2015, whereas in Europe, the question continues to be how much more accommodation the European Central Bank (ECB) will put in the system and whether or not Europe will move to full quantitative easing. Will we see a reversal of underperformance of European markets? This is still the big question.
Overall, we would at least expect the end of the underperformance of European asset prices. Japan will continue to ease; the yen will remain weak, but its equity markets will continue to do well.
Q: What is your view on fixed income for 2015?
We are cautious on fixed-income markets for 2015. We expect the first hike by the Fed will have a negative impact on the yield curve in the US, and on global sovereign bonds. We expect a moderate rise in 10-year bond yields both in US and Europe. So we are cautious on sovereign and we are short duration.
We are positive on risky segments of the fixed-income assets, namely corporate bonds with a focus on HY (US and Euro) focusing on short duration. We advise our client to hold the paper until maturity, for the carry.
Q: Which asset classes do you expect to outperform?
We are positive on risky assets in general; on equity in particular. We overweight mature equity markets, US and Japan. We are neutral for the short term on European equity markets – we will come back to a more positive stance when the ECB will activate more monetary accommodation. Neutral on equity emerging markets; we a positive view on Asia ex Japan.
Basic message on equity is 'buy on dip'; volatility will come back, creating opportunities to increase positions on risky assets.
Q: Biggest unknowns/risks for 2015?
1) Deflation in Europe is clearly a threat. The ECB will react, no doubt about that in our core scenario. Risk would be if the ECB would not arrive to a compromise/consensus to implement the necessary non-conventional monetary accommodation that we expect;
2) US: the market reaction to the beginning of the Fed tightening could surprise, if inflation or growth accelerate more than expected. Then the rise in bond yield could put the Fed behind the curve;
3) China could slow more than expected because the decline in property prices could be more pronounced than expected, with negative consequences on the financial sector.
