11 days ago, the Swiss National Bank suddenly announced it was removing the cap of the Swiss Franc against the Euro, causing the Franc to soar over 30% and the Swiss market to fall over 8% in a matter of hours. Nodding off yet? Stifle that yawn for a second and check this out – that single policy decision caused multiple hedge funds to implode, estimates for companies such as Nestle and Roche to be cut by nearly 15%, and banks including Citi, Deutche Bank and Barclays to collectively lose over $300 million, according to Bloomberg. Your 401k and stock positions were most likely directly impacted. So, it matters. Now, before you close your positions and run off to seek penance in the Himalayas, relax. Stay invested and benefit with the markets in the long term. The story was just an example to highlight the fascinating way in which decisions made in global financial markets across the planet directly impact you. It’s important to know the risks that lie out there so you can plan for your liquidity needs accordingly – and be financially aware of what your money is doing. On that note, let’s prepare for the year ahead.
2014 ended with a pretty solid market performance, with the S&P 500 up over 13%. Here’s a sampling from what the Street’s finest are expecting in 2015:
– Goldman Sachs’ David Kostin predicts a total return of 5% for US stocks, based on elevated corporate profit margins, with buybacks and dividends leading the way in paying back investors.
– Morgan Stanley’s Adam Parker is looking for above 10% from the S&P 500 – stating ‘the core of our thesis is that we are in the middle of a long US expansion, one that may last until 2020’.
– FundStrat’s Thomas Lee is projecting over 15% in returns, saying ‘capital stock is again showing signs of pent-up demand, and as a consequence, companies and households will have to invest [in capex]’.
– Deutche Bank notes ‘the US upswing is self-supporting’. They’re looking for a 5% return from US stocks, and advise opportunistic investors to focus on IT companies, pharmaceuticals, and financial stocks (I assume this is based on a strong dollar, consumption growth and interest rate increases).
– Oppenheimer’s CIO states ‘valuations reflect sustained growth, healthy corporate balance sheets, and less uncertainty about fiscal and monetary policy’.
– PIMCO’s outlook is interestingly underweight US equities, and overweight Europe and Japan. Their reasoning – ‘EM Asia equities offer attractive valuations and may benefit from strong U.S. growth; European financials may benefit from ECB accommodation; we selectively participate in merger arbitrage and other event-driven marketneutral pairings’.
In general, the consensus is in the mid-to-high single digit returns for the S&P 500, with
projected interest rate increases in the 2nd half of the year, and oil prices to be back above $70/barrel. That, by itself, implies a 30% upside in oil – and although the strategists are treating this as pretty obvious, I’m definitely not seeing any barrels being rolled up 6th Avenue by eager investors making room in their garage; oil prices remain in the 40s despite investors saying this for a few weeks now. It’s a nice example of the risks involved in projecting for 2015.
What it means for you: You could, of course, take a passive approach by investing at monthly intervals in the global market, sitting back with a martini and watching reruns of The Big Bang Theory. This could be through a combination of the SPY and VXUS ETFs, or just the VT ETF. Definitely do that with some of your assets. For the remainder, to add some spice to your investment life, here are some themes to watch for and trade on:
– Corporate activism: With investors parched for yield in the bond markets, global markets pretty fairly valued and geopolitical risks fueling uncertainty, expect shareholder activism to continue to target the big behemoths that are slow to grow and adjust to market needs and regulations. Kellogg, Campbell’s, Dupont, IBM, and banks, among others, remain targets. Meanwhile, the average tech company age to IPO at the moment is 11 years, compared to 5 years in the dot com bubble, and there are 48 private companies valued over $1 billion as of December, according to DJ Ventures. See IPOs and M&A activity continuing forward with last year’s trends as we see acquisition trumping organics to fuel growth, and VCs cashing out with the market at serious highs.
– Volatility and stock picking: Stock swings will be pretty frequent in an environment of projected interest rate increases, so wear your seat belts. According to Barron’s, during the 1962-81 span, in which 10-year Treasury yields tripled, large capital (actively managed) mutual funds outperformed the S&P 500 by 3% every year, on average. This year might be similar for stock picking. It also comes on the backdrop of last year, where 80% of large cap funds underperformed the S&P 500, according to CNBC.
– Corporate social responsibility: This theme will overpower profits, with the educated workforce showing an inclination for companies that emphasize this. Google, Facebook, etc remain high on the most-sought-after list, according to LinkedIn. Expect companies emphasizing actual products and their impact on people in conference calls to outperform companies that focus on lukewarm statements such as ‘increasing shareholder value’.
Watch for capital expenditure: Will it increase? This remains possibly the most compelling 2015 question. US profits remain at record highs, balance sheets have tons of cash, and the question is whether executives have the confidence to invest or not. This is a wait-and-must-watch. US wage growth remains another barometer – it has barely moved since 2008, but if inflation picks up and this increases (at the moment, WSJ Economist polls project it to), it bodes well for the US. Meanwhile, the bullish dollar trend should continue in the face of quantitative easing in international markets.
Macro trends: Countries such as Mexico, Indonesia, the Philippines, India and South Korea will outperform international peers. Common trends? Most are net oil importers, have an educated workforce, are reform-oriented, and have self-sustaining economies driven by consumption (in South Korea’s case, exports tied to the US). Meanwhile, be careful with countries such as South Africa, Russia, China and Brazil. Interest rate increases may promote greater capital flights from these countries, and commodity-driven growth may be slow with the bullish dollar holding down prices. Also, if you need any water cooler talk inspiration, there is a slight chance the EU may unravel, based on Greek election results. More to come on that in the coming weeks.
On a parting note, it’s worth remembering that this is the year before the US presidential elections. According to Forbes’ Ken Fisher, the 3rd year of presidential terms hasn’t been negative since 1939, with an average return of 18.5%. That’s a pretty epic statistic. So be prepared. Through this week, we’ll update the Performance & Outlook page with stocks and ETFs to look into for 2015. Meanwhile, start preparing the dips for the Superbowl – and lets hope that the New England Patriots’ inflated expectations are realistic.
