Themes for 2015

22/12/2014 at 4:59 pm

With Christmas almost here and the New Year a little over a week away it is the traditional time for market observers to dust off their crystal balls and treat everyone to their insights on what will happen once that financially significant uptick in the Gregorian calendar has occurred. Accordingly, here are a few themes which this blog believes will be important in 2015.

Debt. Despite a return to the bond market this year, Greece has threatened to become a target of scrutiny again – but amid the wreckage of the credit crunch and Great Recession is far from the only show in town. The collapse in the price of oil this quarter is in part a reflection of the power of Saudi Arabia, with its huge balance sheet reserves, to weather it, as readers will know. On the other hand, those countries with big sovereign debt positions – most of us in the developed world – are hobbled by it.

The US for instance has $12.4trn of treasury instruments outstanding. These are already costing over $400bn in interest each year, a material amount for the budget of even the world’s largest economy. Of that $12.4trn, $4.9trn – almost 40% – matures between now and the end of 2016.

Interest rates. Emergency monetary conditions have already been pared back in many of the countries hardest hit by the events of the last seven years. In the US, the UK and elsewhere, zero or near-zero policy rates are now expected to rise again in the second half of 2015.

With interest payments already high for so many economies, rising rates are an issue, particularly for those whose debt positions are concentrated at the very short end of the yield curve. The burden of debt interest in these cases – already a hindrance to growth via austerity measures and tax increases – will get heavier.

Inflation. With huge capacity overhangs, massive labour market weakness and weak commodity prices, this has not been an issue for most major economies in recent years. However, labour markets in particular are now much healthier than they were even a year ago, and there have been tentative signs already that this has come to bear on price behaviour.

The move down in oil will once more serve to keep inflation in bed for some time, assuming that it does not reverse in the near term. But as economies continue to recover, internal rather than imported price pressures are bound to rise. Markets are not remotely concerned about inflation at the moment. Should this change there will be implications for interest rates across the yield curve and potentially for risk markets too.

Market selection. Risk on versus risk off continues to be an important general theme for markets which remain nervous. But the last couple of years have seen significant divergence between different market types and regions even within that context. In 2014 to date, the US has topped the equity charts for the developed world (+12%), while Asian markets, most notably China (+48%) and India (+31%), have leapt ahead of their emerging peers. More broadly, developed and emerging market equity indices have out- and under-performed each other at various times as the year has gone on.

There is every reason to expect this to continue over next year. As always, sentiment is unpredictable and one cannot plan for black swan events. But bearing in mind the dynamics for growth, the valuation picture and the possible importance of the themes we have already looked at, there are some interesting considerations for portfolios in this area on a fundamental view.

There are of course other questions to think about and apparent anomalies to ponder. These themes should be seen as undercurrents rather than any kind of directional forecast. Market noise aside, however, one or two of them could deliver some material surprises this coming year – pleasant or otherwise.


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