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Q: What were the surprises of 2014? There were some wild cards last year. The drop in oil prices and the speed of the decline has surprised the market, with some industries benefiting, such as airlines and cruise lines, while energy producers have experienced share-price deterioration.
The impact of oil prices has extended into the new year and we expect it will have longer-lasting market ramifications. While some geopolitical conflicts were a surprise, the global markets weathered the storm relatively well.
Q: What regions are you expecting to see the most growth this year?
Some of the areas we expect growth to come in 2015 include European equities. We are looking for European equities, ex-UK, to perform well relative to other asset classes. Margins are depressed but can recover. Operating margins are at a 10-year low, so there is plenty of room for a rebound.
Low valuations and also low energy costs can help boost European consumer spending and corporate earnings. In addition, with the expected European Central Bank (ECB) quantitative easing in the first quarter, it should bode well for European equities.
In the US, the economy continues to recovery but at a moderate pace. The employment picture continues to improve and lower oil prices will benefit the US consumer. The US equity markets may experience increased volatility in the first half of the year as the market prepares for a Federal Reserve rate increase later in the year.
Q: What is your view on fixed income for 2015?
Our view is the 10-year US Treasury will end the year around 2.5% and the US yield curve will flatten with raising short-term rates as the Federal Reserve starts to increase Fed funds in the third quarter. We expect 10-year rates in Japan to remain relatively flat.
Q: Which asset classes do you expect to outperform?
We are expecting increased market volatility in the first half of the year. For portfolios using fixed income as a means to reduce volatility, we would suggest increasing exposure to hedge funds versus fixed income as a means to reduce volatility.
Q: Biggest unknowns/risks for 2015? Central banks are operating in uncharted territory, which increases policy risk. There is currently a divergence in central-bank policy around the world, with the US increasing rates while the ECB and Bank of Japan are easing. Any potential policy missteps from central banks' decision-making could cause unintended consequences. This is something the market will be watching carefully.
Another unknown is the full impact of lower oil prices. While lower oil prices are a benefit for some countries, such as India and Japan, they are a negative for oil-producing countries. Even in the US, some states will have a negative reaction. Texas will feel the negative effects with a decrease in employment and many capital expenditures put on hold. However, US and European consumers will benefit from lower energy prices.
