What is the outlook for multi-asset this year?

This article is part of
Multi-Asset - March 2015

After two strong years of investment returns, 2014 started with considerable optimism.

However, this had turned by the middle of the year, with sentiment dented by a raft of negative geopolitical developments – such as the problems in Ukraine, the rise of Isis and fears over the spread of Ebola.

The economic landscape also weakened in many parts of the world – with emerging markets, led by China, continuing to slow and the eurozone still fighting deflationary pressures.

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Structural issues in both China and Europe are highly unlikely to be resolved quickly and will remain a part of the economic landscape for some time. On a brighter note, the US economy was the standout performer, decoupling from much of the rest of the world.

It is expected that this ‘American exceptionalism’ will continue into the first half of 2015, with leading indicators remaining strong for the US economy – helped by the dramatic fall in the oil price over the past few months. It remains unclear, however, how much of this improvement in consumer discretionary income will be used to boost savings and how much will translate into rising consumption.

Closer to home the UK had a reasonable year. However, the economy softened in the second half of the year, not helped by weak demand from Europe and increasing political uncertainty. Sterling weakened accordingly. It would not be surprising to see a continuation of recent sterling weakness as we head towards the general election in May.

The macroeconomic risks lurking in the shadows of financial markets are significant. In particular, the tug of war between deflation and inflation remains unresolved. At the deflationary end of the rope is debt deleveraging. Although six years have now passed since the global financial crisis, global indebtedness remains at a similar level to 2007.

Government austerity and higher consumer savings rates are likely to remain a feature for some time. At the inflationary end of the rope is very loose monetary policy, which is likely to continue in 2015 as central banks in Europe, Japan and China take up the QE baton from the Federal Reserve.

While it is expected that deflationary forces will continue to prevail in 2015, the risk of higher inflation should also be taken very seriously.

On the valuation front, the aggregate valuation picture has not changed much since the start of 2014. On long-term valuation estimates the UK market is trading a little above fair value, having moved back gradually from a position of significant undervaluation in 2009.

With some selectivity, reasonable returns remain available for the careful, patient investor. But it does suggest returns from the UK stockmarket over the next five years will not repeat those experienced over the past five years.

Combining the current valuation environment with these macro uncertainties, this is an investment environment requiring some careful navigation. The mixed picture in 2014 created some significant stock-by-stock volatility. Several companies experienced a drawdown of more than 30 per cent during the year. These were quite big moves for high quality businesses where the profitability profiles are far more stable than recent share-price volatility suggests.