Will 2015 remain a central banker’s world?
Central bankers have dominated the outlook for global markets for the past five years. They’ve lowered interest rates to zero and implemented unorthodox policies like quantitative easing and forward guidance.
As we approach 2015, one thing appears certain from Russell’s perspective: Global markets once again will be dominated by the actions or inaction of central banks. There’s a difference, however, developing in 2015. We’re likely to see the major central banks head in different directions. The U.S. Federal Reserve and the Bank of England will likely take the first steps towards interest rate normalization while the European Central Bank and Bank of Japan will likely move deeper into unorthodox territory.
With this backdrop, our team of global strategists recently convened to map out our 2015 global outlook (which will be released tomorrow), and we quickly agreed that the pivotal question to address for 2015 centers on the United States. That is, how much economic spare capacity remains in the U.S. economy now that the unemployment rate is below 6%? And how might that affect global capital markets?
The answer could determine the amount of wage and inflation pressure, which in turn will drive the timing and amount of Fed tightening. It also will play a large role in the outlook for corporate profits — as subdued wage growth in recent quarters has generally allowed profit margins to expand and profits to grow at a much faster pace than the overall economy.
To formulate the market predictions in our outlook report, we depend on a set of qualitative and quantitative inputs, all part of our “value, cycle, sentiment” investment strategy process. Our interpretation and analysis of the data informs us of the following global market perspectives for 2015:
- We’re still moderately positive on global equities versus fixed income, though with a smaller overweight to equities.
- Our analysis suggests a light overweight for risk assets and a slight underweight for fixed income duration.
- While U.S. market valuations remain quite stretched, the market we like most in 2015 is Continental Europe/UK Equity.
- In terms of an equity hierarchy for 2015, we rank the major regions in this order: Continental Europe/UK Equity, Japan, US Large Cap and Emerging Markets.
As central banks make their moves in 2015, we recommend investors globally keep a keen eye on macroeconomic signals from the U.S. market. Our models and process tell us to expect only moderate inflation pressures and moderate Fed tightening, which is consistent with expectations for moderate equity returns and a small rise in long-term fixed income interest rates. We believe the U.S. market will set the tone for global capital markets as the Fed begins the process of returning interest rates to more normal levels. Investors will need to be alert to changes in the outlook, some of which possibly may result from policy actions by central banks as they steer the course through 2015.