Before we dive headlong into 2015, let’s take an opportunity to reflect on some of the main events that shaped investment outcomes throughout the previous year.
Tapering of Quantitative Easing in the US
In the beginning of 2014 Janet Yellen was confirmed as the successor to Ben Bernanke as Chair of the US Federal Reserve (Fed). Her appointment was significant because she ended investor speculation over the future of the Fed’s quantitative easing (QE) programme which has supported the US economic recovery since the financial crash in 2008. Shortly after her appointment Yellen confirmed that a tapering of QE would begin.
The withdrawal of QE was largely perceived as a threat to equity markets because investors did not yet have confidence in the US economy’s ability to grow without intervention. However, much to the surprise of many investors, the announcement of tapering did not throw equity markets into a tailspin. In fact, the S&P 500 reached new historical highs in early March to the benefit of many equity investors.
Central Banks keep interest rates low
The tapering of QE in the US led investors to believe that the US economy, and to a certain extent, the global economy was recovering. This prompted another round of speculations, this time over when interest rate would rise. In a recovering economy investors could expect interest rates to rise back to normal levels and for inflation pressures to increase.
However, this was not the case. Central Banks in the UK, US and Europe maintained their position of low interest rates to a backdrop of disappointing economic data, which in turn disappointed fixed income investors, including some of the more risk-averse investors such as pension funds and retirees.
Low interest rates present a challenge for fixed income investors because returns from some of the relatively safe investments, such as government bonds, remained minimal. Those who rely on regular income flows were forced to look to the riskier equity markets to provide higher returns. Once again, equity markets reached new highs during the second quarter of 2014.
Investors shrugged off geopolitical tensions
One of the more interesting trends witnessed last year is the resilience of equity markets to significant geopolitical events. Tensions in Ukraine following President Putin’s annexation of Crimea, an increasing terrorist militant threat from Islamic State, the Ebola outbreak or the impending Scottish Referendum have all failed to veer equity markets from their upward trends in the first half of 2014.
It is only in the last quarter of 2014 we have begun to see signs of investor concern which are attributed to a number of the above factors coupled with the weak economic data in Europe. Nevertheless, perceived as a sign that Central Banks will remain supportive, equity markets have continued to be resilient.
Looking ahead to 2015
Central banks are likely to remain accommodative as economic growth remains fragile. In the UK and US, this means interest rates will stay low. In Emerging Markets, this means focusing on strengthening domestic demand rather than relying to export-led growth alone.
What does this mean for investors?
It is important to remember that despite short-term poor sentiment, all investment decisions should be based on long-term fundamental valuation and growth factors, to that end we believe several important fundamental factors will come into play;
- US employment rates continuing to strengthen
- Weak European economic growth but global growth is still expected to be moderate at circa 3.3%
- Modest global growth will be supportive for company sales. The latest US company earnings figures report unusually high 9% earnings growth, well ahead of the expected 4%
- Equity market valuations are generally around or below their long-term averages making them more attractive when compared to other asset classes such as government bonds
- Commodity prices are also falling, providing a boost for the western world
- We believe that with patience current events will prove to be long-term opportunities.
About Brooks Macdonald
Brooks Macdonald Asset Management Ltd (BMAM) is a specialist investment manager providing discretionary management services for private clients, trusts, charities and pensions funds.
BMAM’s Active Multi Asset Portfolio (MAP) Service is a segregated model portfolio of funds service. It provides access to discretionary management expertise and utilises the successful Brooks Macdonald central investment process.
The MAPs are managed by Jonathan Webster-Smith, who joined Brooks Macdonald in 2001 and currently manages both our model portfolios and our fund of fund range.
Jonathan Webster-Smith, Investment Team Director, Brooks Macdonald Asset Management
This article is for information only and does not constitute advice. Please obtain professional advice before making financial decisions. The views contained in this article are those of Brooks Macdonald and not necessarily those of Wren Sterling.
All information is correct at time of writing
(November 26 2014).