Private banking CIO outlook 2015: Deutsche Bank – Larry Adams
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WEALTH

Private banking CIO outlook 2015: Deutsche Bank – Larry Adams

Larry Adams, CIO for Deutsche Bank's Wealth Management Americas, shares his views on how 2014 was full of surprises and how 2015 could be full of risks.

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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.


Q:
What regions are you expecting to see the most growth this year?


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





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