Equities would remain the main flavor next year supported by a zero interest rate policy from the central banks, but investment managers caution about careful selection of stocks.
The S&P500 index has gained 16 per cent so far in the year, while the Dow Jones Industrial Average has gained more than 12 per cent. This compares with 5 per cent gains in gold, considered as a safe haven instrument. Another volatile commodity, crude oil has shed more than 36 per cent since the start of the year.
“We believe investors should position for higher volatility across their portfolios in 2015 as the denouement of financial repression approaches, in the form of either rising interest rates or debt monetization in 2015 or beyond,” said Michael Hartnett, chief investment strategist at Bank of America Merrill Lynch.
A survey of 5,000 investment professionals conducted by the CFA Institute expect a 3 per cent gain in the S&P500 index in the United States until December 2015, though equity indices in China and India could witness 11 per cent and 10 per cent gains respectively.
In equities, US small caps are an appealing way to gain exposure to the asset class due to extensive exposure to the strong US economy and improved valuations; slow growth in Europe may be hard to overcome and will affect stocks there; and emerging market valuations are appealing in light of growth rates, but investors need to be mindful of sector weightings, investment manager Neuberger Berman said.
Beating market expectations, United States, the world’s biggest economy grew at 5 per cent in the third quarter, triggering a record rally in Dow and S&P500 indices. Analysts feel that continued accommodative central bank policies and an increased focus on job creation and consumer consumption, will have the biggest potential positive impact on global capital markets.
Analysts say that political risks like secessionist and nationalistic movements are the most underestimated risk that could have a negative impact on global capital markets in the medium term.
Unrest in Ukraine and protests in Hong Kong are having an impact on investors’ outlook, although in the case of Hong Kong, this view is inconsistent with local member perceptions of near-term growth prospects.
Most people indicate that political risks were the least well accounted for in the Americas, perhaps reflecting concerns over potential disruptions in energy supplies from Russia as the crisis in Ukraine continues. The second most underestimated global risk identified by members is the demographic trend of ageing populations.
Bank of America Merrill Lynch said the normalization of economic growth and policy rates in the coming years is likely to coincide with more normal bond and equity returns, and higher volatility. Lower expected returns in bond and equity market returns means that theme picking will become more important. The Nasdaq biotech index gave close to 30 per cent returns compared to the MSCI world index, which gave close to 5 per cent.
The bank is gung ho about robotics, cyber security and solar power among others. For example, investors can increase exposure to robotics by investing in Taiwan’s Advantech, and Delta Elect, Intuitive Surgical and General Electric in the United States. Nike employed 106,000 fewer contract workers in 2013 due to greater automation. In 2014 and 2015, robot installations are estimated to increase by 12 per cent per year. Automation will continue to be driven by corporate focus on cost competitiveness, outsourcing of engineering functions, increasing quality requirements and rising wage inflation across emerging markets.
“In our view, companies that should benefit from robotics include industrial automation and robots, robotic surgery, control systems and equipment, and industrial or smart planet,” said Bank of America.
Solar power could be another powerful theme in 2015 amid lower penetration levels and high demand. By the end of 2014, an additional 48.4 Giga Watts (GW) of solar will be added to the global grid and in 2015 annual installed capacity is estimated to grow 20 per cent to reach 58.3GW.
Penetration remains low in this addressable market that continues to grow, particularly in the US. Since 90 per cent of global power generation is water-intensive and water is becoming scarce, demand for solar and wind, both of which use the lowest amount of water per unit of electricity generated, has another structural tailwind.
Companies that should benefit include those financing, installing and servicing solar power arrays, solar project developers, and wind and solar power generators. Companies in areas such as pharmaceuticals and health care, senior living, insurance, drug stores and death care would benefit due to an ageing population.
A one-year increase in life expectancy means up to 7-9 per cent in additional liabilities. Many countries could face additional costs of up to 50 per cent of the gross domestic product for 2010 by 2050. Also, the global spending power of consumers aged more than 60 years is expected to reach $15 trillion by 2020.
In the pharma sector, life expectancy gains mean higher levels of chronic diseases and degenerative illnesses, increasing the need for medical devices, hearing aids, dental and vision care.