Amid plummeting oil prices, uncertainty over QE in Europe and questions about Japan’s growth, it can be difficult for investors to find winners and losers in various asset classes, according to Manulife Asset Management chief economists Megan Greene and Robert Boyda.
They outline the key global themes investors should watch for this year.
1. Over-indebtedness: Total indebtedness by governments and households continues to increase. The upshot for investors is that while demand for fixed income remains robust in the U.S., opportunities in fixed income are likely to be restrained by an overabundance of debt. In the midst of equity market volatility there may be a widespread desire to flee to fixed income, but this may not provide the growth opportunities that many are seeking.
2. Ample liquidity: Investors should focus on the fact that, with so much liquidity being injected into the global monetary system, equity markets are unlikely to come under real pressure. While many investors typically maintain a home bias, monetary policy dynamics offer a strong case for casting a wider investment net and, in particular, examining opportunities in international equity markets.
3. Beggar-thy-neighbor currency actions: Countries are hoping to boost demand and growth by increasing their competitiveness via a weaker currency. A weakening euro, yen and renminbi will likely boost corporate profitability and competitiveness in the Eurozone, Japan and China. Investors should consider that this may help to support growth in these economies, and with it, equity markets.
4. Low government bond yields: Secular stagnation and easy monetary policy is likely to mean the continued compression of government bond yields. While some analysts believe current low yields are simply a result of normal business cycle fluctuations, the current era of oversupply represents a structural break with the past. In the absence of an increase of global demand, U.S. long-term yields should remain below the historical norm of 4% over the five-year forecast.
5. New regulation: As capital requirements for other assets rise, investing in sovereign bonds has become more attractive from a capital cost perspective. Increased regulation is expected to persist for a number of years, as regulators and policymakers continue to grapple with how to avoid a repeat of the crisis. One potential result of increased regulation is lower profitability for financial services firms, and an underpinning of sovereign bond markets as sovereign bonds become relatively more attractive.
6. Demographics and debt: Aging demographics have already impacted policy decisions and macro-economic trends in developed markets such as Japan, North America and Europe. But the global economy and its bond markets are bracing for the emergence of the new geriatrics on the block — from aging Asia. The demographic shift will only accelerate in most major economies, supporting shifts from equities to bonds in 2015 and beyond.
7. Lowflation: As a result of lowflation, both short and long-term interest rates are expected to rise very slowly over the next five years. Short-term rates should increase slightly faster than long-term rates as central banks begin tightening monetary policy. Rising policy rates will push down prices for bonds with short maturities, increasing their yields relative to long-term securities. This could make fixed income opportunities for bonds with longer maturities less attractive. Subdued inflation will also make it more difficult for some countries to stabilize their debt burdens.