Equities should progress despite European headwinds

After assessing many outlooks for 2015, we can say that many of the forecasts for equity market returns for 2015 have been reasonably positive.

After all, GDP growth in the US, the dominant world equity market, in Q4 last year was 5% (annualised), unemployment was at 5.8% and falling, and inflation was fairly meagre at 1.3%. If you combine this with the notion that the Fed, and other central banks, are terrified of tightening too soon and are therefore likely to keep monetary policy extraordinarily loose for some time to come, you have all the ingredients for some decent gains in risk assets for the months ahead.

Also, while equity valuations are above their long-term averages, they are not exorbitant so, for the above reasons, I am broadly positive on equities over the short term. However, as we are now six years into this bull run I thought I would highlight some of the potential headwinds that could spook markets and that investors should be aware of.

Greece

The main source of concern is our old friend and bogey man of the Eurozone crisis, Greece. While the Greek administration has taken steps to stabilise the economy, the debt, in many market commentators’ opinions, remains unsustainably high and it is unlikely that it will be able to pay all of it back. The situation is further complicated by the surge in popularity of the left-wing Syriza party who, if elected in the upcoming election, have suggested they would attempt to re-negotiate the terms of Greece’s involvement in the single currency.

In fact, a breakup of the Eurozone, or a ‘Grexit’ as it has been dubbed, now looks like a distinct possibility. What the effect this will have on markets is anyone’s guess, the Eurozone could even emerge stronger as Angela Merkel, the German chancellor, suggested at a recent press conference. However, what we do know is that it will set a dangerous precedent and cause uncertainty, so it is something investors should be wary of.

The other political problem UK investors should be aware of is the looming general election in May, which looks likely to result in another hung parliament, the constituents of which are proving hard to predict. Once again the only thing we know for sure is that it will cause uncertainty, although I suspect a Labour / SNP coalition will not be well received by the markets. More alarmingly, if UKIP makes significant headway it could stoke fears that the UK may leave the EU altogether.

Russia/Ukraine

Lastly, the situation in Russia and Ukraine seems to be at an impasse. It would be a humiliating climb-down for Vladimir Putin and Russia to change their stance now, and given Mr Putin’s belligerence in the past, it seems unlikely to happen. This may increase the chance that, as Russia is hurt by the falling oil price and the sanctions continue to bite, that Putin may try to reassert his authority and lash out in an unexpected way. Again, any action and its consequence are hard to predict, but the situation remains volatile and could boil over easily.

In conclusion, I expect equity markets to make modest gains in 2015. Two European equity funds that have demonstrated consistent alpha are Blackrock Continental Europe and Henderson European Focus.

A strong bull market would probably require more growth in more parts of the world. However, if my fears outlined above materialise or my assumption that rates are going to be lower for longer proves incorrect, it may spell the end of the current bull run.

By Darius McDermott, managing director, Chelsea


Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Darius' views are his own and do not constitute financial advice.
Published on 22/01/2015