This week we start with a look at the prospects for equity markets in 2015. Dominic Rossi, Fidelity's Global CIO for Equities, believes the US-led bull market is still intact and we will see new highs next year despite further bouts of volatility.
Commodity prices and the Dollar
The oil price has fallen by around 25% since July and that weakness is likely to persist. At the same time, the dollar has appreciated significantly against other major currencies, which deflates other assets, particularly commodities.
The dollar's strength is a result of ongoing improvements in the US. While these have been evident for some time, loose monetary policy has effectively kept a lid on dollar appreciation. With the prospect of rate rises in 2015, coinciding with further quantitative easing in Europe and Japan, that lid has now been lifted.
We could be in for a sustained and significant move higher in the US dollar combined with weaker commodity prices, which has traditionally been supportive for US equities.
US will continue to lead the global markets
The outlook for US earnings also remains positive and it will be earnings and dividend growth that drive the market higher, more than compensating investors for the short-term headwinds provided by interest rate rises.
The bull market of 2003-8 was about Chinese leadership and emerging markets outperforming developed markets. However, today's continuing bull market is about US leadership and intellectual property sectors like pharmaceuticals, biotech and technology outperforming hard assets.
Emerging markets, Europe… and the continuing search for yield
What is good news for the US economy can present something of a hurdle for some other markets.
- Individual emerging markets can succeed if they embrace structural reform and successfully adopt a more domestically orientated economic agenda
- Europe appears to be stuck in the middle; whilst structural challenges remain, a weaker euro could give a modest boost to activity in 2015. Given the adjustment that has taken place in valuations, I am as positive on Europe as I have been for some time, says Rossi.
- We presently have a glut of savings in the global financial system, but this wall of money has no 'pricing power'. With the S&P yielding more than the 10-year treasuries and European markets yielding around 4%, Rossi believes the equity income story will be a key support for stock markets next year.
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Source : Datastream 21.11.2014
Market News
The S&P 500 closed at a record high for the 45th time this year, as China's central bank cut interest rates for the first time in two years and the European Central Bank started buying asset-backed securities in a move designed to encourage banks to lend more and revive the economy.
China's benchmark one-year lending rate was reduced by 40 basis points to 5.6%, whilst deposit rates were lowered by 25 basis points. Separately, the HSBC manufacturing PMI reading fell to a six month low, as new order export growth continued to ease. House prices decreased in 69 of 70 Chinese cities surveyed in October, leading to concerns that a persistent property slowdown could curb demand in the wider economy.
Japan entered recession in the third quarter as the country's economy contracted at an annualised pace of 1.6% in the July-September period, following a decline in GDP of 7.3% in the previous quarter. Prime Minister Abe announced a snap election in December and his intention to postpone a planned increase in the sales tax by 18 months.
The minutes of the last Federal Reserve meeting showed that the committee continues to see a sluggish labour market even though the unemployment rate has declined below 6%. The view of the economy is one that is slowly improving but there was some concern about low inflation. While interest rates are expected to rise in 2015, the questions of when and how fast remain data dependent.
- The Philadelphia Federal Reserve manufacturing survey in the US mid-Atlantic region grew at its fastest pace since December 1993.
- However, readings from Markit for November showed a slowdown in manufacturing growth, mainly caused by weakness in export markets.
- Sales of existing homes rose to an annual rate of 5.26 million units, the highest rate for more than a year.
Flash survey data covering the Eurozone manufacturing and services sectors declined to its lowest score since July 2013, due to weakness in Germany and a contraction in France. However, October UK retail sales grew a more than expected 0.8% on a strong recovery in non-food store sales.
How you can use this information
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