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2015 wealth management outlook

24th Dec 2014
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2015 will present as many opportunities as there are challenges but either way it helps to have a grasp of what’s going on and where it’s taking us, says Roddy Kohn of Kohn Cougar.

By looking where we are today we can use it as a reference point of where we might be going in 2015. In addition we have chosen to focus on two key investor issues: Oil and fixed interest investments.

Where we are today

  • A US$50 Dollar drop in the oil price with crude at US$61.33
  • Europe and Japan teetering on the brink of deflation
  • Russia facing a currency, political and economic crises
  • Increased equity volatility affecting investor confidence
  • Low growth and low inflation throughout many world economies

On the surface of it, it doesn’t sound like a conducive environment for investing, but there are plenty of reasons to be cheerful in 2015 especially if government ministers remain true to their word.

  • Quantitative easing in both Japan and Eurozone will continue to underpin their equity markets and as such this is a positive area to be invested in if you've been avoiding it for the last year. Remember currency falls are likely to be the order of the day so make sure you hedge against this eventuality
  • US economic strength should see US equity markets continue to march ahead while valuations might look stretched the reality is those companies who can continue to improve their profits and grow their markets are going to see their share prices improve
  • The pressure on oil producers is expected to continue at least for the first half of 2015. Oil producing countries inevitably will suffer on many fronts but this may give rise to some bargain buys for the brave investor willing to take a long term view of events
  • Fixed interest markets will continue to defy gravity, naysayers and a raft of fund managers, ourselves included, who find the risks of investing in government gilts and corporate bonds just too high are unlikely to change their views. As the Romans said Caveat Emptor: Buyers beware
  • Commercial property sector will continue to produce good levels of income and modest capital growth but makes for a useful way to diversify your portfolio and lessen risk in the process. No bad thing in times such as these. Choose from Investment trusts, unit trusts and shares depending upon your risk profile
  • Volatility should be expected throughout the year as winners and losers emerge as much from the unknown as the known or as economists are fond of saying Cetrus Paribus

More about oil

No one could have predicted the scale of the recent fall in the price of oil. From an economic point of view there’s no reason why this should have occurred, however, it’s far easier to rationalise it from a political perspective.

Saudi Arabia's oil minister Ali al-Naimi has said that a lower oil price is good for global growth.

What does the oil price fall mean for 2015?

In the short term it will have a negative impact on global inflation figures. Central bankers are seriously worried about deflation however as long as they continue to stick to their guns to “do whatever it takes” to promote inflation, interest rates will remain lower for longer and we will undoubtedly see further quantitative easing in some form or another.

Oil producing countries such as Russia and South Africa will obviously feel the pain while energy consuming countries such as Japan, Indonesia and India will be beneficiaries. Consumers everywhere will benefit which should lead to an increase in disposable income.

Over the last few years quantitative easing (QE) has resulted in a “one way bet” for equity markets with investors being cushioned by the notion that central banks will step in if economies derail. While volatility will undoubtedly continue, the cushion still remains and low interest rates, lots of liquidity and low inflation should be a fertile ground for equity investors.

Fixed interest

Fixed interest markets will be a challenging environment in 2015. While continued QE in Europe and Japan will keep long-term interest rates low the scope for capital gains will be minimal, unless they really do go into a deflationary spiral. Conversely, the potential for interest rate increases in both the US and UK will create volatility and capital weakness. High yield bonds haven’t exhibited a “high yield” for some time. The search for income caused the yield of even the most risky of bonds to be equivalent to the equity yields of many blue chip companies. However, the falling oil price has seen yields widen considerably, especially in the energy sector and for the discerning stock picker there are now opportunities to purchase high yield bonds at yields that reflect their risk.

The search for yield/income should continue to see commercial property be an asset class of choice. We would expect the sector to perform well in both a stagnating and a strengthening economy. If the economy stagnates, interest rates will remain low and the yield from commercial property will be welcome. If interest rates rise, we would hope the central bank would do so only when economic growth became entrenched. While increasing rates may create volatility in the short term, increasing economic growth should translate into increase occupancy and increasing rental growth.

We expect the bull market to continue into 2015 but expect to have to get into the “brace position” as turbulence will be inevitable.

Replies (4)

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Tony Margaritelli, ICPA Chairman
By Tony Margaritelli
24th Dec 2014 18:00

Multi Award winning long time ICPA contributor and supporter Roddy Kohn's views are to be respected and frankly heeded interesting comments about the "brace position" and the higher yield bonds. - Tony Margaritelli Chair ICPA 

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By memyself-eye
26th Dec 2014 15:39

No one?

The fall in the price of oil was inevitable with the growth in Shale production, the slow down in China, the increased efficiencies of users in the west and the mess that it the Eurozone. Not to mention production coming on line from ex war torn middle eastern economies and the determination of the Saudi's to maintain production to drive marginal producers out of business.

The only thing that surprises, is the speed of the fall, but there again markets always over react then over compensate. It's nowt more than human nature.

 

Ps: what is ICPA? 

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Replying to ndb88:
Red Leader
By Red Leader
28th Dec 2014 12:51

investment wisdom

Investment wisdom comes when you learn that you can predict very little about the future, no matter how convincing the prognosis sounds.

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By JC
30th Dec 2014 07:49

Nothing about ...

Small Cap market - flat in 2014 - maybe progress in 2015

Potential impact of Bank exposure by holding near 'junk' oil bonds - which will come about if oil reaches mid $50's. Nevertheless, it is expected to stabilise around $70

'.. According to data compiled by Barclays, energy bonds now make up nearly 16 per cent of the $1.3tn junk bond market — more than three times their proportion 10 years ago. Nearly 45 per cent of this year’s non-investment grade syndicated loans have been in oil and gas ..'

Fixed interest is a timing game - if you believe interest rates will remain at current levels that's Ok, just know when to bail before they rise - otherwise take a capital bath! So you may be trading interest for capital unless careful

Possible reaction from Russia if they continue to be backed into a corner by the EU and others

Indian markets - on the rise during 2014 - will they continue

Biotech markets - could be interesting if the correct ones are chosen

Japan - USDJYP currency on the up - but which way for the country - yen falls stockmarket up?

Buy quality on dips - watch for excessive multiples on stocks (especially US)

Use investment trusts for markets you wish to be in, but are unfamiliar

Greece - perhaps they need the services of Goldman Sachs once again to lie about their performance or provide some 'structured' advice about debts before borrowing more money from the EU - a club they joined in the first place under false pretences

Also helps if Ceteris Paribus (all things being equal) is spelt correctly

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