The big surprises came in the government bond market. Despite already low yields, an end to quantitative easing and a stronger US economy, US Treasury yields fell further over the course of 2014. German Bund yields saw even larger moves lower.
Q What regions are you expecting to see the most growth this year?
The most promising region is the US. We expect US GDP growth to accelerate to 2.9% this year as consumer and business spending increases and fiscal policy stops dragging on growth. We are overweight US equities and credit, given strong corporate profitability and decent balance sheet health.
By contrast with much of the rest of the developed world, the Fed is likely to tighten monetary policy next year, which will support the US dollar.
Q What is your view on fixed income for 2015?
Bond yields have rarely been as low as they are today. While a turning point in yields has been long expected and failed to arrive, low yields mean we can only expect meagre returns from high-grade bonds in coming years. In this environment, we prefer lower-rated bonds. We are overweight credit relative to government bonds.
Q Which asset classes do you expect to outperform?
We expect equities and credit to outperform government bonds, and for US assets to outperform non-US assets. We hold an underweight position in emerging markets (EM), including EM equities and dollar-denominated EM bonds.
Q Biggest unknowns/risks for 2015?
The world is diverging in good and bad ways. Even good divergences, such as the gap between growth in the US and the UK and most other major developed world regions, can be worrying because they raise questions about how this business cycle will play out.
Bad divergences include geopolitical turmoil in several areas around the globe, which create market risks that can be hard for investors to quantify.