2014 review: Which asset class or event surprised you most?

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Written by: Investment Week
12/12/2014

John Redwood, chairman of the investment committee, Charles Stanley Pan Asset

Oil prices

The biggest surprise was the collapse in yields of eurozone government bonds to all-time, multi-century lows

The biggest surprise was the plunge in the price of oil, as the year seemed likely to be punctuated by more religious and political wars in the Middle East.

Most of us rightly expected the world economy to grow by more than three per cent, with increased requirements for oil to heat, light, and power the activity.

Commodity prices had been weak in the earlier stages of the world recovery, and the large destocking that occurred after the commodity bubble might have run its course.

Instead, Saudi Arabia kept on pumping large quantities despite the fall in price. Iraq continued to produce regardless of the war, and the expansion of US oil and gas output continued apace. Chinese demand did not accelerate as some anticipated, and the falling price stopped any move into oil by most investors and speculators.

The fall in oil, and some other commodities, has given the US, UK, European, and Japanese authorities more latitude to keep interest rates down.

 

Colin McLean, managing director, SVM Asset Management

Deflation

2014 was a year of surprises for investors, particularly from geopolitics. However, it paid investors to focus on the continuing US recovery and the potential for stimulation in Europe and China.

The biggest overall surprise was the inexorable move of the global economy towards deflation. At the start of the year, almost all analysts forecasted a rise in bond yields. However, German 10-year government bond yields actually fell below one per cent, with even Spain now at an all-time low, at under two per cent.

Central banks did not expect the fall in inflation, which moved well below targets. The collapse in energy and commodity prices was sudden and a drag on performance – a pattern that looks likely to continue in 2015.

Topping the list of good news was the growth rate for the UK economy, which even wrong-footed the Bank of England, as it flip-flopped on policy through the year – alternately worried about deflation and overheating.

 

Alex Dryden, global market strategist, J.P. Morgan Asset Management

Diverging economies

Looking back over 2014 one word springs to mind: divergence.

At the beginning of the year, many were quietly hopeful over the prospects for Europe and the global economy as a whole.

However, the eurozone has struggled to overcome the geopolitical and economic hurdles that have been thrown in its way, while the US economy has continued to pick up speed.

Such differences are reflected in the position of the regional stock markets. The S&P 500 has broken through record highs and is set to finish the year on a strong footing. In comparison, the Stoxx 600 has struggled to regain the ground it has lost.

 

Andrew Milligan, head of global strategy, Standard Life Investments

Market volatility

Confidence in the world’s largest economy was sufficient enough for the Federal Reserve to end its bond buying programme in October, and indicate that interest rates should rise in 2015.

However, further central bank action was required elsewhere to support activity and prevent deflationary tendencies, with the Bank of Japan adding to its monetary stimulus, while the ECB pushed its deposit rate into negative territory and increased loans to the banking sector through the targeted longer term refinancing options (TLTRO).

Even in China, where worries about asset price bubbles intensified, the central bank has implemented a number of easing measures.

The contrasting fortunes of regional economies led to bouts of market volatility, as shown in October, when investor concerns regarding the impact of local issues on overall growth ebbed and waned. The year’s underlying tone, however, has been one of cautious investor optimism.

 

Gavin Counsell, multi-asset fund manager, Aviva Investors

Bond rally

The performance of bond markets in 2014 came as a major surprise. Yields had been rising fairly sharply in all of the major markets in the second half of 2013, and we would have expected them to continue doing so as speculation about the timing of an eventual hike in US rates intensified.

Instead, we have seen a remarkable turnaround in bond market fortunes as the US central bank began to signal it was in no hurry to lift borrowing costs after all. Monetary policy easing in Europe and Japan, where policymakers have been looking to boost economic activity and ward off deflation, has lent bonds further support.

The stunning rally in peripheral European markets has probably taken us by surprise the most. For example, few could have envisaged Spanish 10-year yields plunging to below two per cent from more than four per cent at the start of the year.

 

Jon Jonsson, portfolio manager, Neuberger Berman Global Bond Absolute Return fund

No rate rises

As we entered 2014, the consensus was for higher rates and underperforming emerging markets. The exact opposite happened. As investors had already positioned for higher rates and sold out of emerging markets, the marginal seller was missing.

Despite consensus expectations for rising interest rates in 2014, longer bond market yields continued to decline during the year. The strong performance in government bonds surprised most market participants.

Last year, emerging markets underperformed across all asset classes as growth steadily disappointed and Federal Reserve tapering raised the risk of funding crises.

After suffering significant outflows during 2013, EM hard currency sovereign assets re-priced significantly following the Russia-Ukraine crisis. This offered an attractive opportunity to buy an asset class that was underowned and undervalued, a rare combination in today’s fixed income markets.

 

Alastair Winter, chief economist, Daniel Stewart & Co

Central banks

My biggest surprise in 2014, and going into 2015, is the resilience of the ‘masters of the universe syndrome’ – ie, belief by investors and some central bankers in the latter being willing and able to support equity prices.

To be fair, the Federal Reserve has tried to make it clear it does not have a third mandate to help Wall Street out. I am not so sure about the ECB’s Draghi, as he plays poker with the Germans. But I have no doubts that Japan’s Kuroda is up for miracle-working duties. There is too much debt everywhere and too much hot money sloshing round the globe.

Any corrections in 2014 in the various markets have been too short to achieve the necessary re-pricing that allows proper valuations. The longer a proper correction of 15 per cent or more lasting several weeks is postponed, the bigger the damage will turn out to be. Frankly, I do not see much unambiguous value in any market right now, including bonds. The dollar looks the safest place to be.

 

Frédérique Carrier, director, portfolio advisory group, RBC Wealth Management

Weaker currencies

 

There were a few notable surprises in 2014. For instance, early in the year, US government bonds rallied strongly due to weaker economic data and concerns regarding emerging markets. The People’s Bank of China introducing two-way risk in the foreign exchange market and weakening the currency markedly in February was another surprise. The extent of the collapse in oil prices was also unexpected.

We have been negative on UK stocks for some time too. The index’s performance depends on the prospects for the mining and energy sectors, which comprise 25% of the index. Based on our outlook for commodity prices, and on political uncertainty, we remain cautious.

For 2015, we expect the global economy will continue to grow, though below historical levels. The US and some emerging markets should grow healthily, the UK could slow down, and Europe and Japan will remain sluggish.

We expect equity markets to generate worthwhile returns. Asia stands out as a region where stock markets offer attractive value.

 

Anthony Willis, investment manager, F&C Multi-Manager team

Bond returns

 

Fixed income returns have been the biggest surprise this year, not least government bonds. Going into 2014, government bond yields in the US and UK were touching three per cent, and consensus was they would drift higher over the course of the year as economic growth picked up, along with increasing expectations for interest rate rises.

But US bond yields are 2.2 per cent and UK bond yield are 1.99 per cent, despite continued healthy GDP data, highlighting that the market is not yet pricing in any interest rate rises for some time.

European sovereign bond yields have continued to fall, even in peripheral European bond markets, as investors price in sovereign QE from the European Central Bank being announced as early as the first quarter of 2015.

Government bond markets are pricing in economic gloom, while equity markets are more bullish. Both cannot be correct and a repricing of one of these asset classes is possible in 2015.

Our view is the risks are more in bonds than in equities. However, given the ongoing dovish tones from central banks, bonds should see support for some time yet.

 

Glyn Owen, investment director, Momentum Global Investment Management

Eurozone stagnates

 

The biggest surprise was the collapse in yields of eurozone government bonds to all-time, multi-century lows, as the spectre of deflation and secular stagnation enveloped the euro area.

German 10-year bund yields fell from around two per cent at the start of the year to below one per cent, while the yields on peripheral eurozone government bonds, issued by countries that have either been bailed out or teetered on the edge of a bail out, also fell dramatically. Few investors anticipated the move, and therefore missed out on the best-performing major assets of 2014.

We now see value in European equities, which is every investor’s least-favoured asset at the moment, as the eurozone struggles with deflationary forces and stuttering growth.

There are lots of excellent companies in Europe which trade globally so are, to some degree, protected from the slow growth in Europe. When the ECB finally starts to buy government bonds, it is likely to set off fireworks in the European equities market.

 

Peter Toogood, investment director, City Financial

US outperformance

 

Consensus positioning as we entered 2014 was markedly in favour of higher interest rates, weaker bond markets, and a strong showing from equities.

This had implications for the bond proxy type equities, and for the shape of the evolving bull market in equities. In practise, sovereign bonds rallied aggressively, taking credit with them, and the fast and furious rally in the defensive sectors continued unabashed. There was some sensible discrimination within asset classes, with the likes of India significantly outperforming, based on a combination of reform and better growth prospects.

The continued outperformance of the US has also been challenging, but is all part of the safe-haven status to which investors have been aspiring. This outperformance is inconsistent with the relative valuations, which are clearly more in favour of ex-US allocations.

The level of comfort in crowded trades became uncomfortable, and the mini-rout in high yield, particularly lower quality high yield, is a gentle reminder that everything has a price.

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