Generally speaking, the 2015 outlooks of many fund and research houses have been, essentially: US economic growth will drive US equities; longterm interest rates should stay low for a long time; the US dollar will likely continue to strengthen and markets will have higher volatility than in 2014.
Aligned with these views is the analysis of Russ Koesterich, global chief investment strategist at BlackRock Investment Institute.
However, Koesterich spoke about risks that could get him to re-evaluate his analysis.
The first is deflation in Europe. He expects the European Central Bank to expand the balance sheet and have full-blown quantitative easing, which will mitigate the risk of significant deflation.
“However, there are more political constraints for the ECB than there are for the Bank of Japan and the US Federal Reserve. If the ECB disappoints and is unable to expand the balance sheet, that will get us to revaluate and it will raise the risk of deflation.”
Second, the Achillies heel in the US: wage growth.
“We believe the Fed will start to raise rates this year in a modest gradual fashion. The economy seems robust. But the Achilles heel is that despite that growth, wage growth remains sluggish and that has persisted for some time.
“If wage growth doesn’t accelerate along with an improvement in the labour market, that would undermine some of our themes.
“It could cause the Fed to delay a rate hike, which would be a game changer.”
Another risk Koesterich cited concerns investor psychology.
“Nearly a decade has passed since the Fed raised rates and an entire generation of investors have lived through those cycles.
“There are some questions about how fixed income and retail investors will respond when the Fed begins to tighten policy probably this summer.”
Stocks in 2015
His preferences for 2015: Stocks instead of bonds and cash. But only stocks in selected sectors such as technology and large, integrated oil companies.
“Japan remains the most attractively priced market, with catalysts for further stock gains on the horizon.”
Bond valuations range from sky-high to average and bond principal is at risk due to rising interest rates. He said the most vulnerable are shorter maturities.
A lack of bonds, he added, is likely to keep long-term yields low, despite the expected rate hike.
Finally, he suggested diversifying portfolios into a wide range of asset classes such as multi-asset funds, alternatives, income strategies and flexible investments for “a smoother ride”.
