19th November 2014
Christmas appears to be earlier each year – it often hits stores before many of us have opened our summer sunblock. It’s not much different with economic and stock market forecasts for the forthcoming year, some of which hit screens back in September or even earlier. But it’s no point pontificating on December 31 – no one will notice.
Whatever the date, there’s the cardinal rule that hazards ahead generate more followers – or what used to be called column inches – than predictions of happiness and good humour.
So against a background of global gloom – especially from political quarters – ING Investment Management’s forecast earlier this week of “more sustained economic growth in 2015” is brave although investors will have to wait until this time next year to judge whether bravery is – or is not – trumped by events.
The Dutch managers concede “2015 will be a year full of challenges and rising policy divergence between nations.” But – and this should put a smile on investors’ faces – they believe the coming year “will see the most sustainable recovery since the crisis with corporates in the US and Japan seeing the greatest improvement in capital expenditure.”
There are ghosts from the past that continue to haunt markets – imbalances and uncertainty, headwinds created by public and private sector deleveraging as capital spending dwindled and cash generation and conservation became the prime purpose. But these factors are fading – unemployment is falling and real wages are starting to rise again. Adding falling oil prices to the mix suggests, they say, that global growth will re-accelerate in 2015.
With more than six years since the 2008 crisis, developed market corporates should rediscover their appetite for expansion. This, ING believes, will mean less in the way of share buybacks, special dividends and other short term investor-pleasing moves, towards more in the way of capital expenditure and merger and acquisition activity. It believes equities will be the asset star for the coming year – followed by global real estate.
Companies will have to spend more as they will increasingly not be able to rely on a limitless pool of cheap labour – in any case, many need to replace clapped out machinery. The forecast increase in M&A activity will be partly defensive – taking out competitors – but also forward looking as companies seek to expand.
The preferred developed markets are the United States and Japan with the far east nation likely to outperform. While “ global imbalances will still weigh on growth and investor sentiment, unorthodox central bank policies will keep overall liquidity conditions easy so both US and Japan are poised to grow above potential.” Japan has “positive exchange rates and a very favourable valuation to growth trade-off.”
The US is more expensive – but still far from “bubble territory”.
And there is some brightness for the eurozone as well. Here it is conceded that the region’s problems are “unlikely to be fully resolved in 2015” but that should not detract from continuing attractive yields from equities in this area. They say: “Much will obviously depend on policymakers delivering but both dividend yield and growth are on offer.”
But if developed markets look good, there is gloom for emerging markets which face “considerable obstacles”. ING can see little coming out of Brazil or Russia. China will continue to grow but at a more restrained pace which will impact on other emerging economies while a return to more normal US monetary policy will put “further pressure” on emerging market capital flows.
It says: “There are system vulnerabilities, macro imbalances and deteriorating competitiveness in emerging markets. China remains the biggest concern. Its labour market is shrinking, and there are questions over real estate valuations.” To which could be added an ageing population and corporate governance risks.
Overall, the ING view is that 2015 will be a good year for equity investors – provided they are underweight in emerging and frontier markets.