The early stages of 2015 served to confound the early-year consensus.
Entering the year, strategists and investors emphasised the opportunity in equities, which were slated to gain from increasing evidence of a sustainable economic recovery in the US. Government bonds were once again unloved as fund managers looked ahead to the prospect of US interest rate hikes.
These expectations may have been understandable but were based more on hope than evidence.
In fact, it has been astonishing how easy it’s been to pinpoint a consensus view at all. Even though similar expectations were dashed in 2014, highlighting the uncertain and perplexing nature of a prolonged, subpar recovery, strategists’ views nevertheless converged around unusually similar forecasts.
In the event, January witnessed outperformance from bonds and data suggested that the impact of the oil price collapse may be much more complex than had been initially expected.
Early figures suggest US consumers are saving much of their financial windfall, perhaps not believing in the sustainability of low oil prices.
US economic growth for the fourth quarter was disappointing and the country’s ‘economic surprise’ indices have fallen sharply. Instead of discussing the timing of rate hikes, most investors’ attentions have turned to global disinflationary pressures.
More than 15 central banks have cut interest rates, the vast majority of which were unforeseen, and the European Central Bank has launched an aggressive asset purchase programme.
This reflects the fact that there has not been a significant shift or normalisation in the global environment. Morgan Stanley appositely suggests authorities may still be using “cyclical tools to paper over structural issues”.
It is certainly true that almost eight years after the onset of the financial crisis, global debt levels remain extreme and the deleveraging cycle continues to exert downward pressures on growth and inflation.
This environment and the policy responses are unprecedented and have led to a confounding mix of the familiar and the unfamiliar in economic performance.
The situation has been exacerbated by the economic slowdown in China, increasing the risk that its government will also seek to devalue its currency against the strong dollar, unleashing a further wave of disinflation on the world.
The conclusion for 2015 is far from unremittingly negative but suggests that we still cannot expect quick fixes to structural problems. In the absence of a sustainable increase in demand, which is most likely to occur only gradually, central banks should keep monetary policy very accommodative.
Against this backdrop, it is quite possible to envisage further progress from equities and other riskier assets. Government bonds should also present tactical opportunities when the consensus on the speed of the recovery becomes too excitable.
But asset class volatilities are likely to be unstable and shifting patterns will continue to catch out many investors.
Mark Harris is head of multi-asset at City Financial