|All the CIO interviews|
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