Managers’ forecasts for 2015

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Max King

Bond yields

With credit growth around the world likely to be muted as a result of constraints, both internal and external, economic growth is likely to remain moderate and inflation low. Nominal bond yields are low in historic terms around the world, but positive in real terms. A tightening of monetary policy in the US and UK is well discounted, so yields should remain low. Bond returns in 2015 should therefore be moderately positive.

Equities

Global equities trade on a multiple of about 14.5x 12-month forward earnings. This is reasonable but not cheap. Earnings growth is likely to be in high single digits in 2014 and 2015. With the economic cycle likely to be long, owing to moderate growth exhausting spare capacity only slowly, earnings growth should continue into 2016 and probably 2017. Equity markets are likely to generate returns in line with earnings growth plus dividends, meaning low double digits annually. A rerating to a higher forward multiple is more likely than a derating.

Property

All property markets are local. We are happy to invest in companies and markets offering good rental growth and the potential for asset value gains through refurbishment and redevelopment on top of reasonable rental yields. We continue to favour primary over secondary or tertiary in terms of country, location, asset type and buildings in spite of the lower yield.

Commodities

Moderate demand growth and restricted supply should allow prices to recover. Companies are focused on raising returns from flat prices, so such a recovery will be positive for share prices. The long-term trends remain; developed world demand for energy is in decline and the energy intensiveness of emerging markets growth will fall, too. Chinese growth will become much less metal intensive. Technology will increase the fuel efficiency of planes and motor vehicles and the replacement cycle means that this will continue.

Cash

Cash is unattractive because of the good returns available from investment assets – the greater the risk, the higher the return. Still, low inflation means that the real return from cash is only modestly negative, so from time to time it will be worth holding cash to await the attractive tactical opportunity in markets provided by occasional bursts of volatility.

Gavin Counsell

Multi-asset fund manager, Aviva Investors

Bond yields

We are moderately bullish on corporate bonds. Although investors’ ongoing hunt for extra returns has pushed the yield spread over government bonds to its lowest level for some time, companies’ balance sheets are generally in healthy shape and the level of defaults is expected to stay low. As for government bonds, we expect European markets to outperform, because the European Central Bank is inching towards what is bound to be a controversial step – namely the purchase of government debt.

Equities

Valuations still look reasonable compared with the low prospective rates of return offered by rival asset classes. On balance the global economic outlook is improving and hence dividends will continue to offer support. While it looks like markets will have to contend with a period of tighter monetary policy in the US and UK before long, further policy easing is on the cards in Europe and Japan, and possibly China too. Nevertheless, we do not believe all equity markets will fare equally well. Developed markets appear to offer the best value.

Property

UK property looks to be reasonably priced. But given the magnitude of the recovery seen over the past two years, we expect to see price growth moderate over the course of 2015.

Commodities

Commodities are likely to remain under pressure as they contend with moderating economic growth in China – the source of the boom in many commodity prices in recent years. On top of this, the diversification benefits of commodity investments are questionable when one considers that multi-asset funds can gain exposure to broadly the same drivers of returns – but at a reduced cost – by investing in emerging market equities and bonds.

Cash

We are only using cash for liquidity reasons; over any scenario, most asset classes will bet it comfortably. It only makes sense if you are worried about the return of your capital and not return on capital.

Steve Waddington

Multi-asset portfolio manager, Insight Investment

Bond yields

Returns from fixed income in 2015 will be influenced heavily by any change in expectations surrounding US Federal Reserve policy. The eventual tightening in US policy rates will put upward pressure on not only US but global bond yields as well. The spread between German bunds and treasuries is close to an historic wide, while eurozone peripheral spreads also appear less attractive. Valuations are most stretched in high yield, but we do not yet see bubble-like valuations that might prove a cause for concern.

Equities

The potential normalisation of interest rates, particularly in the US, presents a headwind to equity market performance. That said, we believe the biggest risk to growth assets is the possibility of a material deterioration in the economic outlook. Earnings multiples have begun to rerate and default expectations are very low, which implies a degree of vulnerability if growth disappoints. Anticipating developments in the European and emerging markets will therefore be particularly important over the next six months.

Property

We do not believe that real estate valuations are very attractive today. In our portfolio, we prefer to include real estate asset exposure by investing in infrastructure, including both social and core infrastructure such as rail and power, which typically offer a greater certainty of returns than real estate.

Commodities

We believe the supply and demand dynamics for commodities are unfavourable. The commodities supercycle was supported by unsustainable rates of growth and investment in China, encouraging producers to expand their capital expenditure and there now appears to be a supply and demand imbalance. Oil supply remains strong, with more being produced by non-Opec countries, to the extent that these nations have considered but refrained from cutting supply. Sub-par global economic growth and the strong US dollar have also weighed on demand.

Cash

The threat of policy tightening brings with it a greater risk of sell-offs in which all major asset classes are correlated on the downside. There is a risk that government bonds may not provide the diversification benefits they have offered historically. This presents the possibility that cash may become one of the few safe havens for investors, and will come down to whether the negative correlation between equity and government bond markets shifts into positive territory.