ONE OF the biggest stories remains the weakness in commodity prices, particularly oil, losing half its value in the final six months of 2014.
This should be a net positive for many developed and emerging markets including the US, Europe, India, China and South Africa which are net oil importers. In the US it has been calculated that oil below $50 (R575) a barrel translates into an average annual tax cut per household of some $1 500.
Global markets began experiencing more volatility in the final months of 2014. Uncertainty with economic growth levels in Europe and Japan helped raise fears of disappointing global growth into 2015.
The new QE (quantitative easing) programme announced by the European Central Bank( ECB) which will inject e1.1 trillion (R14 trillion) into sovereign and other bonds – will lead to a weaker euro, but will help boost inflation. Europe is already experiencing deflation so the QE programme at e60 billion per month until late 2016 will help prime the pump and boost prices.
Global growth will continue to diverge this year with the US leading. It is clear the world remains in the throes of two-speed recovery. We expect higher short-term rates in the US with euro zone and Japanese rates moving sideways. Negative borrowing rates exist in the euro zone and Switzerland.
Momentum
Despite the US experiencing annual 2014 gains of about 13 percent in the broad-based MSCI US index, the strong dollar impacted global equity returns. The MSCI World gained a paltry 4.9 percent for 2014, while the MSCI EMU (euro zone) index rose 4.3 percent in euros but posted a negative return in US dollars.
With 10-year US Treasury rates around 1.9 percent – well below last year’s levels, it is expected the Federal Reserve will raise rates around mid-year. These continued record low rates indicate that the US remains a safe haven for global investors. Further, it shows the weakness in Europe which is struggling to recover from another recession suffered in 2014. Threats of a triple dip recession in the euro zone has led finally to the approval of QE across Europe in 2015.
The US economy is gathering momentum posting regular monthly gains exceeding 200 000 jobs (December about 250 000 and the prior two months were revised upwards).
Unemployment at 5.6 percent is now almost at half the levels seen during the Great Recession. Almost 11 million new jobs have been created during the recovery. Finding value in record US equity prices is more difficult than its beaten down European counterparts. The case for US equities is premised largely on continued impressive earnings among large corporates.
At 14 times earnings, Europe trades at a discount to the US market p:e ratio of 17. Despite a stronger dollar we believe lower energy prices and the gross domestic product pick-up will ensure positive US corporate earnings – leaving sufficient upside for US stocks to post healthy gains in 2015. Investors should expect more volatility given that valuations, by many measures, are not cheap by historical standards.
Emerging markets
No doubt the weaker euro which is moving towards parity to the dollar will help boost European exports – helping the euro zone to escape the clutches of recession. While Europe may appear to muddle along, there are tailwinds helping it in 2015 with credit easing, the ECB’s QE programme and the declining euro – off more than 12 percent against the dollar since early 2014.
The expected European recovery faltered in 2014, as did the Abenomics plan in Japan, which went into reverse after its sales tax hike. It and the euro zone are expected to grow little more than 1 percent in 2015, while the US is on course to hit 3 percent growth.
The UK outperformed its European neighbours in 2014, effectively decoupling from the weakest areas of the euro zone.
Emerging markets failed to overcome the headwinds of weak commodity prices and the slowdown in China, the world’s second largest economy representing 12 percent of global output – larger than the three other Brics (Brazil, Russia, India) combined.
China’s foreign exchange reserves continue to grow – at almost $4 trillion. If the economy can grow by 7 percent in 2015, this will exceed growth predictions of 6 percent for India and 4.7 percent for emerging markets.
Expectations are that emerging Asia outside China will surprise on the upside given the pick-up in US economic activity. Since the US accounts for one-fifth of the Association of South-East Asian Nations bloc’s exports – this region is set to benefit from a stronger US growth rate in 2015 too.
Latin America is expected to be weighed down by a weak Brazilian economy that will struggle to achieve a 1 percent gain this year. Sanctions on Russia and the weak oil price has led to weakness in its economy.
US inflation prospects have subsided with the significant drop in oil prices. It is unlikely the Fed will raise rates much without evidence of renewed inflation. We are not expecting much Fed tightening in 2015, despite the historically record low interest rates currently experienced.
Anthony Ginsberg is managing director at GinsGlobal Index Funds. (www.ginsglobal.com)