On the surface, 2015 is shaping up to be an extremely tough year for investors.
Not only is the world economy troubled by a persistently weak eurozone, a recession in Japan and slowing growth in emerging markets, but its prospects are also hostage to worrying political developments, particularly Russia’s worsening relationship with the West. Should a sharp downturn ensue in 2015, riskier asset classes would surely suffer, while government bonds and the US dollar could add to this year’s gains.
In our view, however, the investment climate in 2015 is unlikely to be so harsh. Although the global economy faces a number of obstacles, I believe it can avoid a steep downturn and deliver modest growth. Under a base-case scenario, equities should outperform bonds, with developed markets – particularly Japan – performing well, and some emerging stock markets likely to recover due to their attractive initial valuations. Emerging market debt should also offer interesting investment opportunities, in contrast to developed government bond markets where historically low yields point to meagre returns this year.
Global growth and inflation will remain below the historical norm in 2015. World output is likely to expand at a sub-par pace over the next few years chiefly because public spending cuts will continue to be a feature of government policy worldwide. There is little room to boost demand through fiscal stimulus – public debts have risen, not fallen, since the 2008 financial crisis.
Even so, growth promises to be better this year than it was in 2014. One reason is lower energy prices. As oil prices have fallen to their lowest levels since 2005 on an inflation-adjusted basis, consumer spending is certain to rise, which in turn should lift growth.
Indeed, I estimate that the oil price decline has already added as much as 0.5 percentage points to global growth this year. Lower oil prices should also provide a boost for emerging economies, particularly oil importers, some of whom are taking advantage of lower energy costs to implement reforms such as the elimination of fuel subsidies.
Monetary policy should also help underpin world growth. Although the US Federal Reserve is edging towards interest rate hikes, central banks elsewhere – the Bank of Japan and the ECB in particular – are expected to act more aggressively to stave off the threat of deflation. This should sustain central bank liquidity globally through 2015.
Economists expect global growth to rise to 3.2 per cent from 2.7 per cent in 2014; the US will be the best-performing major economy, registering growth of some 3 per cent; output will edge up by 1.1 per cent in the eurozone and by 1.5 per cent in Japan. Emerging markets will grow at 4.8 per cent, up from 4.4 per cent in 2014. But we believe the picture could improve still further – 2015 might deliver some positive growth surprises.
When it comes to assessing the investment prospects for major asset classes, equities continue to offer better return prospects than bonds. This is chiefly due to relative value – stocks are simply less expensive, and should deliver high single-digit returns in 2015. Even so, as market expectations for growth and interest rates are bound to fluctuate, investors should be prepared for higher volatility.
