Tactical allocation benefits

Our preferred developed world stock market for 2015 is Japan. Japanese stocks are attractive on several fronts. First, the sharp depreciation in the Japanese yen has boosted the competitiveness of corporate Japan versus its global peers. Second, Japanese companies are becoming more shareholder-friendly, raising the prospect of a sustained increase in their return on equity. The third reason is linked to valuations. The Japanese stock market rally has so far been fuelled by a rise in corporate earnings rather than the expansion of earnings multiples seen in other equity markets; this makes the valuation of the Japanese market increasingly attractive.

By contrast, in the US, corporate profits – rather than valuation multiples - need to improve to drive markets higher. With the economy growing steadily, job creation strong, and disposable income rising thanks to falling energy costs, we see the potential for earnings growth in a number of US industry sectors.

The outlook for Europe remains mixed. I believe the investment climate for stocks should steadily improve as the ECB is becoming ever more aggressive in its bid to avert deflation. What is more, the weak euro should improve the competitiveness of the region’s exporters, which in turn could boost corporate earnings. But risks remain – the shifting political climate in Greece (and the UK) is among our key concerns and could prove to be a source of market volatility.

When it comes to industry sectors, I prefer consumer discretionary and technology stocks. Lower fuel costs should translate into higher consumer spending – in the US and elsewhere – boosting earnings among consumer-facing companies. The tech sector’s prospects, meanwhile, should be underpinned by healthy levels of capital expenditure. We remain cautious on energy-related stocks and materials companies for the time being given the ructions in commodity markets.

The outlook for emerging market stocks is improving, but not for every sector or country as the recent fall in the price of oil and other commodities is a mixed blessing for the asset class. Valuations are compelling in some areas, but in many cases there are few fundamental reasons pointing to gains this year. The markets of countries whose competitive positions have improved thanks to weaker currencies and structural reforms are likely to deliver healthy returns. Markets that are home to companies that benefit from falling oil prices (India, Korea, Taiwan) look better positioned than those that are dominated by commodity exporters (Russia, Brazil).

In fixed income, government bonds do not look especially appealing. But with economic growth and inflation likely to be modest and ultra-easy monetary policies of both the ECB and BoJ countering the Fed’s withdrawal of monetary support, we do not expect a dramatic rise in bond yields. Investment grade bonds are also unlikely to see much in the way of selling pressure as investor appetite for yield should persist. The recent sell-off in corporate speculative-grade debt, meanwhile, could throw up investment opportunities as yields are at attractive levels even though investors should be wary of growing financial pressures among issuers in the shale oil sector.