We recently released the January 2015 edition of Quarterly Strategic Outlook. This covers the broad economic and market themes we expect to play out in 2015 with asset class commentary from our Head of Investment Strategy Keith Poore.
The December quarter and year was a
rewarding one for diversified fund investors. Fixed interest produced healthy
returns on the back of some softer global activity data, increased asset
purchases from the Bank of Japan, a sharp decline in oil prices and associated
lower inflation expectations.
Returns from global equities were also
generally solid thanks to gains in US and Japanese shares with both markets
continuing to experience earnings growth and policy support. Returns from New
Zealand shares were strong which coincides with the robust local economy;
relatively high dividend yields and a low exposure to commodity stocks also
contributed to local market gains. In contrast, a higher commodity exposure
held back the Australian market.
Property and infrastructure were the best
performing asset classes over the quarter. Given their income characteristics
these assets continue to benefit from lower bond yields. A fall in oil prices
led a large decline in commodities over the quarter. This was largely due to
OPEC’s decision not to cut production in the face of slowing global oil demand.
The New Zealand dollar moved higher over the quarter, especially against the
Japanese yen, euro and Australian dollar as the market priced in central bank
easing of one form or another from these regions.
2015 looks set to be characterised by
continued ‘low-flation’ and the battle to avoid deflation. The slump in the oil price has added a
further dimension to the inflation story, while at the same time providing a welcome
boost to growth in those economies continuing to struggle with weak
demand. Global growth is expected to be
modestly stronger in 2015, although there are both upside and downside risks.
Oil presents a key upside risk to growth
especially in the key oil importing economies.
But that will be determined by how much further the oil price falls and
where it eventually settles. Downside
risks include a sharper property-related slowdown in China and continued
sluggish demand in the Eurozone and Japan.
When the numbers are in and the dust has settled global growth for 2014
is likely to come in at around 3.3%, the same as last year. In 2015 we expect growth will be slightly
higher at 3.5%, followed by 3.7% in 2016.
Global bond yields surprised on the
downside in 2014 and this is a major reason why the higher dividend asset
classes (property, infrastructure, New Zealand shares) were the top performers
in 2014. We expect bond yields to move
modestly higher over the next twelve months as the US takes the first small steps
toward policy normalisation. Bond purchases by Japan and Eurozone central banks
should limit the rise in yields globally.
We also expect the subdued inflation
backdrop to be around for some time, so any rate rise in the US this year will
be associated with higher growth. This will be positive for earnings growth and
share prices given valuations are not overextended. Quantitative easing in
Japan and Europe should also support shares in these regions. Nevertheless,
global shares entered a flatter and more volatile return profile over the
second half of 2014 and we expect this pattern to continue over 2015. A modest
increase in bond yields should also result in a modest underperformance by
higher yielding shares this year.
We expect the US dollar will follow US
rates higher over 2015, and by implication push the New Zealand dollar lower.
The recent sharp decline in commodities, while explainable, is now looking
overdone given global growth will approach potential this year. Although
commodity prices could go lower in the near term we believe the balance of
risks have moved to the upside over a medium term horizon.
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