2014 - a positive year for investors

2014 has had its share of worries with a range of geopolitical threats, uneven global growth, the end of quantitative easing in the US, plunging oil and iron ore prices and a debilitating debate about budget cuts in Australia. Yet again, events have conspired to indicate deflation as opposed to inflation is more of a risk. Despite all this it was still a reasonable environment for most assets. Key themes have been:

The combination of okay but not too hot, not too cold global growth and low inflation meant the global investment cycle remained firmly in the “sweet spot” for investors. But as over the last few years, it was not a simple "risk on" environment. In particular, commodity related trades including the Australian share market were big underperformers.

Yr to date to Nov. Source: Thomson Reuters, Morningstar, REIA, AMP Capital

2015 - still in a global sweet spot

As always there seems to be plenty of calls for global recession in the year ahead based on everything from quantitative easing to demographics. However, there remains good reason for cautious optimism.

 

Source: Bloomberg, AMP Capital

In short, the next global recession looks to be a long way off – maybe not until later this decade in accordance with the cyclical pattern that has prevailed since the 1970s of major recessions every 8-10 years: mid 1970s, early 1980s, early 1990s, early 2000s, late 2000s, later this decade?

Reflecting all this:

For Australia, non-mining activity is likely to continue to pick up pace but in the face of falling national income and subdued confidence this will likely require further monetary stimulus in the form of a lower $A and a further RBA interest rate cut. If this occurs then improving conditions in sectors like housing construction, consumer spending, tourism, manufacturing and higher education should see GDP growth move up to around 3%. At the same time inflation is likely to remain benign. The RBA is expected to cut the cash rate to 2.25% early in the year with a 50% chance of another cut in the June quarter.

Implications for investors?

The continuing sweet spot combination of okay global growth, but still low inflation and easy money is positive for growth assets. But an eventual rate hike by the Fed and ongoing geopolitical flare ups are likely to cause volatility.

What to watch?

The main things to keep an eye on in 2015 are:


 

About the Author

Dr Shane Oliver, Head of Investment Strategy and Economics and Chief Economist at AMP Capital is responsible for AMP Capital's diversified investment funds. He also provides economic forecasts and analysis of key variables and issues affecting, or likely to affect, all asset markets.

Important note: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided.