Fund Selector: Righting the wrongs of 2014
Regular readers of this column will have been left in no doubt about my views during 2014 – these were a mixture of ‘right’, ‘not right’ and ‘not right yet’ (cash v bonds).
Now seems a good time to look at US v Europe, where there were mixed results in 2014, and where we are for 2015.
One of the ‘right’ views that we held during 2014 was the continued strength of the US economy. In fact, I suspect the Schroder Multi-Manager team was probably one of the most bullish in its views of the likely 2014 US GDP growth. Continued loose monetary policy has enabled strong gains in job creation and distinct signs of wage growth. This has historically led to an uptick in US consumption, which in turn leads to good GDP growth.
In late 2014 the oil price began its descent from $100 per barrel to $50 per barrel, which was another bullish signal for growth as our interpretation is that this is an over supply issue, not a decline in demand, so an already bullish view of the US economy needed to be upgraded further.
Equally, our opinion that the European economy may struggle to return to moderate growth rates was also correct, but this was more of a consensus view.
The interpretation of some of these economic observations into investment views probably has to go in the ‘not right’ camp, as the S&P 500 index materially outperformed the broader European equivalents.
Our view was that the US economy clearly had the better growth momentum, but this very strength was going to lead to a reduction in monetary policy – the end of quantitative easing (QE) – and ultimately rising interest rates, which could unhinge a very expensively rated stockmarket.
Another ‘right’ view was that the US dollar would enter into a strong phase relative to most currencies, the euro included. This was predicated on the view that the strong US economy would bring forward the date when interest rates would rise, at a time when most other interest rates would be held down or even reduced further.
So what now for 2015? The momentum in economic data sees the US continue its strong growth trajectory, though the ‘doves’ at the Federal Reserve still seem too worried to call for higher rates now.
If the positive data keeps emerging, then markets may well be surprised when rates begin their path to normalisation sooner than expected.
The clarion call for the US stockmarket bulls has been rates would be lower for longer. Well if this is not the case, then what would the bullish narrative be? Profit margins are already at extended levels and so is the rating of the market.
The European economy has been in the doldrums for sometime and investors have largely given up on its ability to turn a corner. However, we remain far more optimistic, as a combination of weaker currency, cheaper oil and less austerity have really helped to remove the brakes on growth.
Fears of deflation provided just enough panic to allow the European Central Bank to embark on a larger-than-expected QE programme, which might just be the missing piece of the puzzle to help Europe.
At the risk of being ‘not right’ again, we favour European equities over US equities for 2015.
Marcus Brookes is head of multi-manager at Schroders
