Private banking CIO outlook 2015: Deutsche Bank – Larry Adams

Further reading

All the CIO interviews

What were the surprises of 2014?

There were many:

• While we thought oil prices would struggle and remain around $90/barrel, falling below $65 was a surprise;

• The Treasury rally given accelerating US growth;

• Continued fixed-income fund inflows, as we expected more flows into the equity space;

• Poor hedge fund performance, given the uptick in volatility;

• Defensive sector resiliency – average outperformance of defensive sectors versus cyclicals year to date is around 600 basis points;

• The Republican sweep across congressional and gubernatorial races – while we expected them to win, not necessarily by as large of a margin... now 54-46 advantage in the Senate;

• And while we expected large cap to outperform small cap in 2014, the magnitude of the underperformance of small cap stocks was larger than expected.

We are anticipating 3.2% in the US, and Asia should once again be led by China growing 6.8%.

Q: What is your view on fixed income for 2015?

Despite our expectation for a gradual recovery in global GDP, muted inflation, the potential for policy error,  and investors sceptical of growth prospects will likely limit the rise in long-term US Treasury (12-month forecasts of 10-year 2.6%) and German Bund (10-year 0.95%) yields in 2015. This modest rise should result in little to no return potential for sovereign investors. We recommend an overweight to higher yielding fixed-income sectors. Credit and emerging-market hard currency bonds should be supported by low default rates, improving corporate and government balance sheets and stable sovereign rates.

Q: Which asset classes do you expect to outperform?

Equities. With bond yields at or near record lows and spreads historically low, returns for fixed-income investors will be muted (less than 5%). However, the modest acceleration of growth in 2015, robust earnings growth (8% to 10%), shareholder friendly activities (eg buybacks, dividend increases, M&A, etc), accommodative monetary policy and low interest-rate environment should support equity returns between 5% to 10% next year.

Q: Biggest unknowns/risks for 2015?

• Geopolitical as the decline in oil prices creates the potential for civil unrest. 

• Political with key elections in Spain and the UK. 

• Policy error if ECB fails to deliver or stimulate growth and/or the Fed raises rates too early. 

• The negative effects of oil's decline are more substantial than forecast (e.g. earnings, credit stress with high yield defaults, steep drop off in capex spending). 

• Another winter similar to last year that threatens heightened expectations for growth. 

• Treasury yields sharply accelerate as Fed pulls away from Treasury market. Municipal defaults as midwestern states suffer from production shut downs and heightened unemployment. 

• Cyber attacks in current global technology world. 

• Banks earnings get squeezed from tight trading environment (low spreads), flatter yield curve and lack of loan demand. 

• Dollar rally accelerates well beyond our targets and hampers earnings environment for multinationals.

• Consumer and business confidence deteriorate