Investment Strategies
Wealth Managers Set Out Their Predictions, Asset Allocation Calls For 2015

Here is another roundup of economic and investment predictions by major wealth management houses for 2015.
Here is another roundup of predictions, hopes, fears and expectations for the coming 12 months from the global private banking industry. (To see a previous collection of views about what 2015 might hold in store, click here.)
UBS
Global chief investment officer Mark Haefele in the firm’s wealth
management division argues that the Swiss firm still sees the US
as the “main event” as it is the country coming out ahead in a
world of diverging policies and outcomes.
“With the Fed voicing concerns about the labour market and remaining data dependent, we don’t think it will stand in the way of real GDP accelerating toward 3 per cent in 2015. The consumer is benefiting from lower gasoline prices and contained mortgage rates; relatively easy bank lending conditions are stimulating investment; and government fiscal policy is no longer a drag. We continue to overweight US equities, US high yield credit and the US dollar. Of course, we will continue to monitor the impact of lower energy prices on the high yield credit market, but for now we believe default risks are contained,” Haefele said in a note.
“Meanwhile in the eurozone, European Central Bank chief Mario Draghi’s party has never really got off the ground. He’s been serving up some modest libations every time people threaten to leave, but nobody’s really dancing or carrying on. He knows he probably needs to offer something stronger, but some of his co-hosts are not so keen on this, as they are more worried about tomorrow’s clean-up than boosting current momentum. We expect to see a modest acceleration in eurozone growth, to 1.2 per cent from 0.8 per cent, thanks to the recent weakness in the euro, looser bank lending standards, and the recent improvement in money supply growth. There is also a strong possibility that Draghi’s co-hosts finally admit the party isn’t as fun as it should be, and let him dole out some stronger measures. But growth isn’t going to be spectacular,” he continued.
Over a six-month horizon, UBS is neutral on eurozone equities, while underweighting both the euro and the Swiss franc. However, the recent moves in oil have prompted the bank to upgrade Swiss equities to overweight, given the country’s lower weighting of energy stocks, relative to an increased underweight in the UK, whose main equity index has a 15 per cent energy weighting.
“We are neutral on the European energy sector as a whole since the oil price is below the sector’s average free cash flow breakeven for capital expenditure and dividends,” he added.
Lombard Odier
The Swiss bank says its 10 investment ideas for 2015 are:
-- Prefer US to euro sovereign bonds in a low-interest rate
environment;
-- Favour equities over fixed income on valuation grounds;
-- Hold some alternative assets to withstand higher equity-bond
correlations if markets correct;
-- Stay cautious on commodities;
-- Be overweight Asia relative to Latin America and emerging
European countries;
-- Gain exposure to the US consumer story and be selective
holders of US high-yield debt;
-- Keep exposure to select Asian emerging credit and local
currency debt;
-- As the Fed tightens interest rates, be long of the US dollar
and expect further flattening of the US bond market yield
curve;
-- Prefer European to US credit and be overweight European
equities, especially high-quality cyclical stocks and financials,
and
-- Diversify internationally in equities through US dollar-based
portfolios to hedge currency risks.
Pictet Wealth Management
Christophe Donay, head of asset allocation and macro research
expects the US dollar to strengthen in 2015. He also reckons that
US equities represent a stronger bet than their eurozone
counterparts next year. Japanese equities are attractive, he
says, although investors should hedge exposure to the yen.
Donay says emerging market equities are too risky for the likely
returns they can generate. “The risk/return characteristics of
emerging market equities remain unfavourable. We are protecting
client portfolios from potential shocks with 10-year US
Treasuries. Some carefully selected European periphery sovereign
bonds look attractive through a diversified approach. Some
high-yield corporate bonds (US in particular) remain
appealing.”
“Nevertheless, corporate bonds come with increased interest rate
and duration risks. Meanwhile, gold is still facing significant
challenges. Hedge funds and private equity enable investors to
better diversify risk and increase return sources,” Donay
continued.
“A regime shift is shaping the global economy going into 2015,
with the United States leading the way: a business cycle regime
is taking over the reins from a monetary regime. Nevertheless,
the global economic backdrop continues to be characterised by the
‘three GDs’: the Great De-monetisation in the United States, the
Great Divergence in the euro area and the Great Dynamics in
emerging markets,” he said.
Crédit Agricole Suisse Private Banking
Dr Marie Owens Thomsen, chief economist, coined the expression
“Transflation”, defined as a state where a positive supply shock
in an environment of constant aggregate demand causes prices
and/or inflation to fall and GDP to expand.
The world is experiencing transflation as there are positive supply shocks in oil, leading to the recent sharp decline in oil prices, and also in agriculture. Since wages have stopped falling in developed countries, the deflation caused by the positive supply shocks will allow real wages to expand and lead to a boost in disposable income and therefore GDP, she says.
The recent sharp fall in the price of oil is positive for growth consumption and corporate earnings, although the scale of the price drop is a negative development. A fear of deflation and problems for Russia are likely to weigh on markets, she said.
Owens Thomsen said it is an auspicious time to prepare a shopping list of stocks/countries that have been indiscriminately dumped by investors during some market selloffs, since they could benefit from lower oil price. Japan may be top of this shopping list, she says.
Fidelity Solutions
Trevor Greetham, Director of Asset Allocation at Fidelity
Solutions, highlights the parallels with the 1990s: the dollar is
strong, US stocks are fresh from all-time highs while commodities
and emerging markets are weak. As we enter 2015, he is mindful of
how quickly 1998’s deflationary bust moved into 1999’s
inflationary boom. A low oil price and ECB QE could at some point
trigger a synchronised global recovery with higher commodity
prices and higher interest rates.
The Association of Investment Companies
The AIC’s annual poll of member investment company fund managers
finds sentiment positive for next year - although there are some
causes for concern. Some 91 per cent of managers said they expect
markets in general to rise in 2015, with Europe by far the most
favoured region (39 per cent), followed by the US (22 per cent)
and Asia Pacific excluding Japan (17 per cent). Responses came
from investment company fund managers representing over a quarter
of the industry (27 per cent), with £3 3 billion in assets under
management.
Managers did highlight potential risks to equities for next year: 41 per cent of managers think the weakening of developed economies is the greatest threat to equities for next year, whilst deflation was another concern for 18 per cent of managers, followed, equally, by UK election worries, recession and Russia/Ukraine difficulties (all 9 per cent).
Robert Horrocks, chief investment officer, Matthews
Asia
The US-based wealth manager says the slowdown in headline growth
in China is simply due to the hangover from the economic problems
of the U.S. and Europe. It said in a note that investors in China
may be the short-term beneficiary of US growth due to the fact
market valuations have not been imbued with any lofty
expectations.
Japan remains a better prospect for demand growth than Europe in the short run and it argued that Bank of Japan head Haruhiko Kuroda will continue to push inflation expectations up to 2 per cent and keep them there – a weaker yen is the symptom of the policy, not the policy itself. In India, momentum has been based on the hope, rather than reality, of reforms, and there is a risk of disappointment in markets next year.
“All in all, I think we will go into 2015 optimistic about the future. We will continue to invest in the part of the world that is most focused on reforms. It is the part of the world that, according to the International Monetary Fund, will account for two-thirds of the world’s middle class in 2050 and we position our portfolios accordingly. That puts us a little at odds with the conventional wisdom; at least as it is expressed in the markets, which tends to have a shorter-term investment horizon and a clear preference for high yield bonds and US equities. Short-term earnings growth will likely be supported by improving margins and returns on equity. That makes me modestly optimistic—and my long-term view is more optimistic still,” Horrocks added.
GAM and Swiss & Global Asset Management
The firms comment on alternative fixed income strategies that
they say can deliver real returns in a rising interest rate
environment.
Mortgage-backed securities
“Some investors still mistrust the MBS asset class. This is a
mistake – not only has the MBS market changed but these
instruments provide a great opportunity to counter disappointing
yields across traditional bonds. The US MBS market is vast; at $7
trillion it constitutes 30 per cent of the US bond market and 15
per cent of the global bond market, second only to US Treasuries.
It is now much more robust and has considerably less systematic
risk, thanks to improved lending standards and a new approach to
ratings. The current low supply and rising demand for non-agency
MBS bonds makes for attractive capital gains and we expect the
non-agency market to recover strongly as investors return.”
Tom Mansley, fund manager, GAM Star MBS Total Return
fund
Catastrophe bonds
“We expect catastrophe bond issuance to increase by 25 per cent
in 2015 as the catastrophe insurance market continues to
transition from a self-retained model toward a capital markets
finance model. Driven in part by volatile climate trends, rapidly
growing catastrophe risks have created significant shortfalls in
insurance coverage versus the economic value at risk (“Disaster
Gaps”). Disaster Gaps now stand at between $300 billion and $500
billion globally and, in conjunction with increasingly stringent
capital adequacy rules for insurers (such as the impending
Solvency II), are leading insurers to partner with external
sources of capital to help shoulder the burden of rapidly growing
catastrophe losses. Catastrophe bonds and other insurance-linked
securities (ILS) today cover just under 10–12 per cent of capital
needs. This sizable deficit is driving impressive growth in the
asset class.”
John SEO, fund manager, GAM Star Cat Bond fund
Asset-Backed Securities
“The commencement of the ECB’s ABS purchasing programme has
already seen spreads tightening as a result of the rise in market
liquidity and growing investor demand. As liquidity and spreads
continue to improve, we expect the impact to be felt most
strongly in the more risky sectors and in peripheral Europe.
While European ABS are becoming more attractive, regulatory
change is essential to address the un-level playing field and
ensure long term revival in the market. ABS offers attractive
risk premiums and valuations compared to covered and corporate
bonds. Vintage tranches (from the pre-crisis era) offer good
quality securities with limited credit risk, often trading below
par. In peripheral Europe our focus is on senior tranches as
mezzanine debt suffers from a lack of liquidity. CLOs also offer
a healthy premium over several other sectors.”
Laurence Kubli and Matthias Wildhaber, fund managers, JB
ABS Fund
Convertible bonds
“With 80 per cent of the world’s bonds yielding less than 2 per
cent, traditional buy and hold strategies will assuredly deliver
uninspiring long-term returns for fixed income investors. Along
with certain local emerging bond markets, convertible debt
remains one of our preferred fixed income sectors. Unlike
traditional fixed income securities, convertible bonds have
unlimited potential upside and have significantly outperformed
high yield bonds during previous rate hiking cycles. Whilst many
debt markets are facing an upper bound for prices, equity markets
may move ahead in 2015 despite lofty valuations and heady levels
of investor optimism which could engender more market swings.
This heightened volatility would suit our protection strategies
that sit alongside convertible securities, so aiding capital
preservation.”
Tim Haywood, fund manager, JB Absolute Return Bond
Fund
Junior bank debt
“The importance of the ECB’s role as the supervisor of the de
facto 'European banking sector’ should not be underestimated both
as a stick and a carrot to improve the creditworthiness of bank
debt, reduce systemic risk and hence act as a positive influence
on the prices of banks’ junior bonds. Basel III came into force
on 1 January 2014 and until all the new provisions are phased-in
between 2014 and 2019, banks will be adding layer after layer of
buffers on top of their equity capital to withstand future crises
and downturns. With banks becoming safer, their junior debt will
also become safer, which is positive for subordinated bonds and
should support a further increase in capital gains.”
Anthony Smouha, fund manager, GAM Star Credit
Opportunities
Emerging market Bonds
“Differentiation is the name of the game for bond investors.
While a lot of emerging market focus has been on BRIC countries,
there is a large heterogeneous group of more than 60 countries
from which to pick the best opportunities, with different markets
and unsynchronised economic cycles. A positive rebalancing story
is developing in Central Europe, where most countries have
already rebalanced and reduced credit and are now growing faster
than in other regions. We are also finding attractive
opportunities in a number of small frontier markets, which are
currently under researched by the investment community. Sri Lanka
and the Dominican Republic are two examples. Although a
potentially strong dollar might be a headwind for EM FX in
general, opportunities can be found among reforming countries
like Poland, Mexico and India. For local bonds, we like to be
long in curves where central banks have acted and valuations
already offer adjusted yields, as is the case in Colombia.”
Enzo Puntillo, fund manager, JB Emerging Markets
Opportunities Bond Fund