Where to look for returns in 2015: What will happen to stock markets?

The coming year is expected to provide opportunities for patient investors

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The Independent Online

What will happen to stock markets in 2015? Will it be a repeat of 2014, which started with hopes of the Footsie climbing above the magical 7,000 mark, but ended the year near enough to the same place that it started?

That doesn’t mean investments in 2014 were without their ups and downs: there were plenty of them, which would have left canny investors – who got in at the bottom and sold at the top – celebrating a healthy surplus over the 12 months.

But those steady folk, who like to sit back and take a long-term view, may have not approached the end of 2014 with such gladness. There were several moments of uncertainty during the year. There was the Ebola outbreak, the rise of the Islamic State, the end of Fed tapering, a slowdown in Chinese growth, and more problems in Europe. Meanwhile, President Putin threatened to erect another Iron Curtain before the Russian economy started to collapse in December.

But apart from a stock market wobble in October it was a reasonable year for equities. There will certainly be several more moments of uncertainty to embrace in 2015, not least because of the general election in May.

But in which directions should investors be looking for opportunities? “It could be all about holding our nerve and being patient – and getting used to a lower return environment,” reckons Darius McDermott of Chelsea Financial Services. “Given the lack of obvious alternatives and a nascent global recovery, equities still look the best option for both capital and income returns. I would also argue that in this less fertile ground for bargains, we are in ideal territory for stock pickers to unearth pockets of value.”

Mr McDermott predicts that we would need a major world conflict or an acute rise in interest rates to see equities endure more than technical correction. “After years of macro-driven markets, the focus is now on fundamentals – and company performance,” he says. “Hence, I believe the role of active managers will be vital in 2015. The key will be to position yourself for gains but keep close an eye on capital preservation.”

The Association of Investment Companies’ annual poll of fund managers, published last week, found sentiment positive for 2015, although there were some causes for concern. Some nine out of 10 managers said they expect markets in general to rise in 2015, with Europe by far the most favoured region – by 39 per cent – followed by the US, by 22 per cent.

You’d expect fund managers to be positive about returns – after all, their job is to chase them – but the level of positivity for 2015 was surprising. Nearly half the managers expect the Footsie to end the year at between 6,500 to 7,000. Meanwhile some 37 per cent expect markets to close 2015 between 7,000 and 7,500.

That seems unlikely given the volatility markets experienced in December, but only hindsight will tell if their estimates are close.

Meanwhile, investors should stop obsessing over charges and concentrate on performance in 2015, according to one expert. Brian Dennehy, the managing director of FundExpert.co.uk, said: “There is a tendency among investors and the financial press to obsess over fund charges and platform fees.  While these are a consideration, investors should first and foremost seek outstanding performance after charges. This is vastly more important.”

He also advises investors that the turn of the year is a good time to take stock. “Take a moment to reflect on your investments,” Mr Dennehy advises. “Are your goals still correct? Should you update your income requirements?  How have your funds done over the last year? It’s difficult to know where you want to get to until you know where you are starting,” he adds.

Meanwhile Mr McDermott advises keeping an eye on the news. “Uncertainty may hurt markets in the run-up to the general election. TV debates will be crucial, and it looks unlikely that any party will achieve an overall majority. Markets will cope with mild political uncertainty, but not huge disruption.”

Fund manager view 

The investment environment we have been operating in for the last five years has been favourable with strong returns and low volatility, due to abundant liquidity, recovering corporate earnings and favourable starting valuations.

Looking into 2015, these favourable factors are weaker. The US, the main source of historic liquidity, is now reducing its bond purchases. While the Bank of Japan is increasing the size of its balance sheet and Europe is under pressure to follow, the combined impact is unlikely to balance the US reduction.

Corporate earnings are growing at a more normal pace after the sharp recovery phase, with debt deleveraging still restraining nominal demand.

Lastly, valuations of equities, while still attractive against other assets, are above historic averages, particularly in the US.

For all these reasons, we believe nominal returns in equity markets will be more muted in the next three years – hence the importance of active management and strong stock selection to drive some additional gains.”

Lucy MacDonald manages Brunner Investment Trust

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