What Might Be Ahead in 2015?
January 07, 2015
Another year has passed, and the year 2015 is upon us. At this time of year, fund managers, investment advisors, and individual investors naturally ask themselves, “What might happen this year in financial markets? How should I be positioned?”
Looking at the big picture, the outlook for 2015 is really not that different than the outlook for 2014 in both equity and credit-oriented fixed income markets, with a few notable exceptions. While no one can predict the future, in general, we maintain our optimistic outlook for equity markets. Valuations have increased but remain reasonable, and further multiple expansion remains possible. Global GDP growth rates continue to improve, and earnings per share (EPS) growth estimates are in the 8% range for 2015. The equity markets therefore offer reasonable valuations and reasonable earnings growth rates which look attractive to us, along with a dividend yield of 2.7% on a global basis. These global equity market attributes compare very favourably to a 10 year U.S. Treasury yield of 2.03% (at this time of writing).
On the fixed income side, while we only invest in the corporate, high yield, and loan markets, the outlook remains positive. The U.S. Federal Reserve (Fed) is likely to increase the Fed funds rate in the second half of 2015, which could result in mild downward pressure on bond prices. However, this may be more than offset by the fixed coupon and possible narrowing of credit spreads, generating a solid total rate of return. While loans should experience less pricing pressure due to their floating rate nature, the lower coupon is likely to result in a total return modestly below high yield bonds. Defaults in both loans and bonds should continue to remain low as the U.S. economy steadily improves.
- Small caps are likely to show improved relative performance. Last year large caps outperformed small caps by 8.8% in the U.S., and 14.3% in Canada. This leaves small caps looking attractively valued, particularly in Canada according to our Canadian small cap experts. We expect a much better year for small caps overall in 2015.
- Canadians still do not have enough invested outside of Canada. The U.S. market exceeded most people’s return expectations in 2014, making it the fifth year out of the past six where it has meaningfully exceeded one year forward consensus return expectations. European equities did not perform as well as expected, but still managed a 7.6% total return. With 8.2% and 8.9% earnings growth forecasted for the U.S. and Europe (including UK, 13.2% for Europe excluding UK) respectively, the global equity market remains a good combination of growing earnings and reasonable valuations.
- The non-investment grade credit markets experienced a challenging year last year, but we see the potential for recovery in 2015. Two segments of the fixed income market which were hit hard in 2014 – CCC rated credit and Energy, as mentioned, could recover nicely. In our view fixed income funds that can properly time an overweight position in these two sectors are poised to outperform in 2015.
- Lower oil prices offer obvious benefits to consumer and transportation related sectors. However, the Oil and Gas sector could really offer some upside this year, both in equity and select fixed income opportunities. The sector came down a lot in the second half of 2014, but could bounce nicely in 2015. In 2014, Canadian Energy ETFs saw very significant inflows, illustrating that investors are recognizing this opportunity. Keep in mind, Norrep Energy Class has more upside potential than this passive investment option, and is a great way to take a position in the sector.
We have some great investment solutions at Norrep that aim to uncover value in the areas mentioned above, including Norrep Global Income Growth. This global equity balanced fund is a great combination of value, growth and yield. It will provide you with much needed exposure to global equity markets, select fixed income opportunities, and currently offers a tax-advantaged annualized yield of 4.1%, paid monthly.
Overall, we continue to see a number of opportunities in 2015. We are looking forward with renewed optimism, and wish you all the best in 2015.
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