2015: the year ahead
by Mark Causer
Looking from above, 2014 was indeed yet another busy year for global economies – there was a lot going on all around the world and astute investors and their advisers were able to make modest returns, while many of the benchmark indexes told a different story – one of poor or even negative returns. There were of course several shining lights.
But that was 2014!
For 2015, Financial Keys has a view and we will continue our research process, speaking with other investment professionals and investment managers to understand their positions and then take the best of this information and use this as part of our ongoing review process. We do not hide the fact that there may well be macro and micro events that we might miss, but at this early stage, this is our most valid opinion on what will drive markets in 2015
Only very recently, Glenn Stevens suggested that further weakness in the Australian dollar would be required to balance the economy. How do you force down the AUD, even after its somewhat resilience after large energy and resource price falls? Reduce interest rates. Therefore, it is likely that we could see another drop in the cash rate, even as low as 1.5%, but more likely 2%. It is 2.5% today.
What might this do? This move would / should support equity markets from falling.….for now.
The AUD could well fall to around the mid 75c mark against the USD – this will provide some support to the declining iron ore and oil prices, as they are both priced back into USD.
The first six months of our market does not appear to be overly bright as the 2014 pain from resource / commodity price declines will be hard to recoup quickly and that both iron ore and oil may have found materially lower price levels for some time to come, at least until the end of the 2015 financial year (June 2015).
The Australian Government has a lot of work to do up to the Federal Budget in May 2015 and it is possible that the only growth our market sees is from dividend income and currency appreciation for those Australian companies receiving sales from overseas.
China is slowing, but it will not stop. The second half of 2015, we would expect overall conditions to start to improve, notwithstanding other shocks we might see in the first half. A lower AUD as well as lower (than today) interest rates, may well be sufficient to re-start our economy.
A couple of early KEY dates to watch will include 15, 28 January, 3 February and 3 March (ABS employment data, Quarterly CPI, first RBA meeting [interest rate signal], second RBA meeting [interest rate signal])
Growth likely to continue to be driven by the housing sector. For continued US growth, this outcome is important. One little known statistic that might support this growth centres around the United States Bankruptcy Code. Chapter 13 of this Code explains that bankruptcy’s are discharged from credit reports (a report a bank might look at when someone applies for a home loan) after a period of seven years (just think how many of these type of Bankruptcy’s occurred in the 2007-2008 meltdown – think MILLIONS) - many of these people will now be looking to re-enter the housing market, with record low interest rates available.
As a result of the above, US banks will probably need to go to equity markets in search of capital to lend to new (old) market entrants
In terms of market, this may well lead to further US dollar appreciation, whilst equity market strength might not be seen until mid-year
However, as about 46% of sales come from outside of the US, a stronger dollar hurts them – this will place pressure on raising interest rates TOO early – so investors will have that little bit extra confidence for now, investing in US markets!
From an Australian perspective, if the AUD continues to fall against the USD, you should look to receive additional returns through ‘currency’ performance
China’s business investments still account for around 50% of the Country’s GDP (compared to the US, which is less than 20%). The issue with this is it leads to excess production capacity, which in turn leads to price competition and, ultimately, lower profitability for local companies
The flow-through of the US housing sector’s continued recovery should help China’s manufacturing industry chew up some of the aforementioned excess production capacity but the effects of this might not be seen until the latter half of the year
A low iron ore price will continue to place pressure on more expensive Chinese miners, force more closures, which will place pressure back onto the Government to maintain sensible levels of unemployment – how involved will the Chinese Government become? This is hard to say.
If the free market is left alone, these miners will bow out and this will spend up the recovery of the supply / demand balance in iron ore markets, which are currently heavily skewed to the supply side.
Europe we see remaining as a poor investment choice for 2015. The only way we see this changing is some major policy changes from the ECB that would have to include significant quantitative easing – which is happening presently.
Will Greek elections once again derail or delay QE? Is it actually possible that Greece will exit the Eurozone in 2015?
Japan is an interesting case. There has been increased chatter about revisiting there pacifist ways, driven by the increasing amount of territorial disputes with China. This could lead to an increase in military spending, helping stimulate the seemingly perpetually stagnant economy. In a country with a majority controlling government, the stimulus so far in 2014 has had little long term (positive) impact.
Russia could be in for some trouble in the coming year with lower oil and gold prices putting growing pressure on its economy.
Germany, France and Italy are all on the cusp of headinginto technical recessions
Oil, Energy and Iron ore prices should stabilize in the latter part of 2015 – bringing some confidence back to the Australian market.
One thing is for sure, 2015 will be another exciting year for global investment markets. Financial Keys will of course, continue with its ongoing research process and try to avoid all the ‘noise’ that comes with market volatility. By continuing to recommend clients invest into quality, we are confident that any negative market performance is only temporary, that then quality will generally rise to the surface.
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