Divergent global monetary policies will make markets even more volatile in 2015, said the asset management arm of State Street Corporation.
The US and UK are expected to raise interest rates in 2015 while Europe and Japan are expected to keep rates low while continuing their quantitative easing policies. China has joined in by announcing a suprise interest rate cut in November aimed at propping up a sagging economy.
But the improving economic and earnings environment in some countries bring opportunities even if the markets seem expensive.
“While the US appears fully valued, short-term momentum continues to favor dollar assets and even modest earnings increases will be supportive to US equity prices,” Rick Lacaille, global chief investment officer said.
“Despite 2014 being marked as the year of recovery, very few countries witnessed this, with the exception of the US, which demonstrated a real resilience to market conditions and rising geopolitical tension.”
According to Lacaille, the US economy will likely accelerate to 3% in 2015 while the eurozone countries will grow slightly faster than in 2014.
“In developing markets, the biggest influence, China, should grow by about 7%, while those countries that pursue reform agendas offer the best potential [investment environments],” Lacaille said.
At current valuations, the firm believes Asian and European markets offer an attractive entry point for long-term investors looking for greater upside potential.
“Investors must be mindful of increased volatility in equity markets as a result of divergent global monetary policies. An intelligent assessment of the divergent environment and its risks and opportunities will reward the astute investor in 2015.”
Reforms in EMs
During 2014, emerging markets rallied due to elections that swept in reform-minded governments in India, Indonesia and Brazil.
“Investors may want to consider taking an active investment approach, tilt allocations toward reformers and consider emerging market small caps for their domestic focus and dynamic growth potential,” Lacaille said.
In 2015, China's reforms, which include measures to restructure state-owned enterprises and wean them off state support, are expected to continue.
In India, the reform agenda, which is being watched closely by the investment community, aims to reduce bureaucracy and loosen infrastructure bottlenecks.
Flattening yield curve
State Street expects the US and the UK to begin tightening fiscal policy next year and believes that Europe, China and Japan will continue their economic stimulus policies.
“Investors can expect the US yield curve to flatten further as a rise in short-term rates is offset by overseas demand for the US dollar and longer-dated treasuries.”