Investors took stock of a widening gap between the world’s economies in 2014, reports Chief Investment Officer Chris Ralph.
The divergence of the world’s economies and monetary policies preoccupied global markets as 2014 progressed, and investors assessed the growing gap between the performance of the US and UK economies and the other developed nations. Although many equity markets – including in the UK, US and Japan – were near to, or at, record levels in the second half of the year, returns were a little mixed over the 12 months. However, the MSCI World index generated a solid 11.5% return in 2014.
The US economy gathered pace during 2014, after severe weather at the start of the year temporarily froze its recovery. The UK outperformed expectations with the highest level of growth among the major developed nations. However, Japan and the eurozone fell short of growth hopes, with the former dipping back into recession in the third quarter as the latter remained sluggish. Amid the divergence of growth levels and low levels of inflation, the global economy continues to pull clear, if unevenly, from the financial crisis of 2008.
While central bankers in the US and UK tighten policy and look to raise interest rates later in 2015, Japan in October engaged in further monetary easing. In the eurozone, policymakers continued to promise a version of quantitative easing to help lift growth and support financial assets – with markets expecting a decision early this year. China too has looked to pursue more stimuli to ease concerns over its slowing – but by most standards impressive – growth.
Geopolitical risks loomed large, from Russia’s policy in Ukraine to conflict across the Middle East; and these threats were compounded by the further fall in the price of oil after the Organization of the Petroleum Exporting Countries declined to cut its output. Falling oil prices also put further pressure on the Kremlin – amid Western sanctions, a sliding rouble and talk of a Russian debt default – and other commodity-oriented economies, such as Brazil. A strengthening dollar also squeezed emerging markets.
The fall in the price of oil also weighed on inflation forecasts and pushed the expectation of a rate rise by the US Federal Reserve further into 2015. The price of Brent crude fell 46% over 2014 to $58 a barrel and has continued to fall in the New Year. Consumers will undoubtedly benefit from lower costs – prices at the pumps already reflect falling oil prices – but whether this means more consumer spending (which, in turn, will help to reinvigorate the recovery) or greater levels of debt repayment remains an unknown.
The end of the Fed’s monthly asset-purchase scheme, and market concerns over the pace of global growth, injected some volatility into the global bond market in the final quarter. Treasury and gilt yields remained compressed as the flight to safety sustained the rally for high-quality government and corporate debt. Policy accommodation by the major central banks and the weakness of oil prices were the main drivers of returns for fixed-income markets.
In Europe, policymakers addressed the lack of growth in 2014, with hints that they would adopt a form of bond-purchase programme to stimulate the economy and support asset prices, despite deep-seated opposition from Germany. However, with the eurozone slipping into deflation in December, investors are now waiting on the European Central Bank president Mario Draghi to announce his next move. Greece’s impending general election is also unsettling markets, with a victory for the far left threatening a crisis for the eurozone and a Greek exit from the single currency.
Meanwhile, UK markets continue to expect an interest rate rise later in 2015 despite inflation continuing to fall and concerns lingering over the robustness of the UK recovery. But the focus for now will be on the general election in spring. Whatever the outcome, the vote takes place amid a far-reaching constitutional review that is set to reshape the UK in the wake of last year’s Scottish referendum. The May poll could also open the way for Westminster to address the other big question for Britain: membership of the European Union.
Uncertainty over elections, falling oil prices, geopolitics, the challenge in Europe, global growth and stimulus policies, as well as the Ebola outbreak in West Africa, has dominated the start of 2015; but markets, despite intra-day movements, are broadly flat since the start of the year. Our advice to investors is not to dwell unduly on short-term events. Our consistent message is that investors should plan ahead, diversify and have the appropriate different set of opportunities in their portfolios. Investors should not try to time the market. Instead, invest for – and remain focused on – the long term.
Source: Financial Express; performance figures to 31 December 2014, expressed in sterling terms. Please be aware that past performance is not indicative of future performance. The value of an investment may fall as well as rise and you may get back less than you invested. Returns on equities cannot be guaranteed. Equities do not provide the security of capital characteristic of a deposit with a bank or building society.
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