By Mike Dolan
LONDON (Reuters) - Turbulent October may prove a microcosm of the investment year ahead - a gut-wrenching rollercoaster ride for world markets that ultimately ended up back where it started, except for one or two notable casualties along the way.
Simmering investor anxiety is all but guaranteed next year by expectations of the first U.S. interest rate rise in nine years, and the Bank of England could well follow suit.
A UK election and possible subsequent debate on European Union exit also packs market risks. A possible European Central Bank move into sovereign bond buying remains a wild card, as do Greek elections and Spain's political struggle with Catalonian separatists. China's slowdown and Japan's aggressive economic stimulus dominate Asia.
Russia's deepening economic crisis, amid sinking oil prices and a sanctions war with the West over Ukraine, is another red flag.
Yet for all that, there's most likely a sense of deja vu surrounding investor positioning for 2015, and a desire to repeat a playbook that worked out reasonably well for multi-asset funds this year.
This year's story was one of modest equity gains and relentlessly buoyant bonds. This was driven by a stuttering but virtually inflation-free Western economy, where consumer prices were suppressed by falling oil, food and commodity prices - and these in turn were sunk by a rising dollar and a slowdown in China.
Few seem willing to bet against a replay of that scenario next year. And whatever monetary stimulus the Federal Reserve may be removing will likely be replaced by further adrenalin shots from either the Bank of Japan or European Central Bank.
What's more, it's hard to argue against a continued dollar-led bias toward U.S. assets, or commodities and currencies of commodity exporters remaining under pressure. Stimulus-watchers may switch to European equity from Tokyo.
But arguably the biggest task will be to hold your nerve through periodic October-like lunges, when world equities lost up to 7 percent before rallying into the black by month-end, and 10-year U.S. Treasury yields dropped 35 basis points on Oct. 15 only to rebound back where they started just two days later.
The BoJ's surprising stimulus expansion perhaps helped save many markets from a stickier year-end, starved of Fed largesse. Next year, too, many feel any renewed turbulence in Europe's flagging economy will elicit a similar response from the ECB.
But for all the angst, and the measures dispensed by the central banks in response, the real casualty is likely to be returns over time.
"We're facing a world where all major asset markets are much higher than they were a few years ago, prospective returns are much lower by definition, and the possibility of greater volatility is very, very high," said Giordano Lombardo, Group Chief Investment Officer at Pioneer Investments in Milan.
NAVIGATING MINEFIELDS
For asset managers setting out views at Reuters 2015 Investment Outlook Summit next week, the temptation is simply to diversify portfolios as much as possible and buy a selection of hedges as buffers for a bumpy ride.
Deflation, or at least persistent 'low-flation', looms large over every fund, even as academic estimates suggest the world is as indebted on aggregate today as it was before the credit crisis seven years ago. But so does the chance of more monetary stimulus from central banks, should economic fears intensify.
Nowhere has this been truer than in Europe, where annual euro zone inflation has slumped to near zero as the region's economic recovery has juddered to a halt again. But even in faster-growing Britain or the United States, inflation remains below 2 percent targets as wage growth stays stagnant.
"'Lower for longer' will be the name of the game. This view determines our stance on asset allocation," said Marino Valensise, chair of Barings Asset Management's Strategic Policy Group.
It's this thinking that partly explains why benign equity forecasts of 12 months ago proved accurate, despite a gradual withdrawal of Fed bond buying all year and amid leftfield political shocks from Ukraine to Syria and Iraq and even West Africa's Ebola emergency.
Real economic and revenue growth has been hard to come by, but continued cost-cutting ensured 10-12 percent rises in annual profits on Wall St and in Europe through the third quarter.
Developed market equities, meanwhile, have returned more than 8 percent so far in 2014 - with a 10 percent dollar surge helping U.S. stocks outperform again as U.S. investors mull staying at home.
Deeply negative commodities and buoyant government and corporate bonds reflect a clear disinflation theme, even if that's harder to square with gains for emerging and frontier market equities of between 6 and 12 percent.
Ten-year Treasuries, as see
By Mike Dolan
LONDON (Reuters) - Turbulent October may prove a microcosm of the investment year ahead - a gut-wrenching rollercoaster ride for world markets that ultimately ended up back where it started, except for one or two notable casualties along the way.
Simmering investor anxiety is all but guaranteed next year by expectations of the first U.S. interest rate rise in nine years, and the Bank of England could well follow suit.
A UK election and possible subsequent debate on European Union exit also packs market risks. A possible European Central Bank move into sovereign bond buying remains a wild card, as do Greek elections and Spain's political struggle with Catalonian separatists. China's slowdown and Japan's aggressive economic stimulus dominate Asia.
Russia's deepening economic crisis, amid sinking oil prices and a sanctions war with the West over Ukraine, is another red flag.
Yet for all that, there's most likely a sense of deja vu surrounding investor positioning for 2015, and a desire to repeat a playbook that worked out reasonably well for multi-asset funds this year.
This year's story was one of modest equity gains and relentlessly buoyant bonds. This was driven by a stuttering but virtually inflation-free Western economy, where consumer prices were suppressed by falling oil, food and commodity prices - and these in turn were sunk by a rising dollar and a slowdown in China.
Few seem willing to bet against a replay of that scenario next year. And whatever monetary stimulus the Federal Reserve may be removing will likely be replaced by further adrenalin shots from either the Bank of Japan or European Central Bank.
What's more, it's hard to argue against a continued dollar-led bias toward U.S. assets, or commodities and currencies of commodity exporters remaining under pressure. Stimulus-watchers may switch to European equity from Tokyo.
But arguably the biggest task will be to hold your nerve through periodic October-like lunges, when world equities lost up to 7 percent before rallying into the black by month-end, and 10-year U.S. Treasury yields dropped 35 basis points on Oct. 15 only to rebound back where they started just two days later.
The BoJ's surprising stimulus expansion perhaps helped save many markets from a stickier year-end, starved of Fed largesse. Next year, too, many feel any renewed turbulence in Europe's flagging economy will elicit a similar response from the ECB.
But for all the angst, and the measures dispensed by the central banks in response, the real casualty is likely to be returns over time.
"We're facing a world where all major asset markets are much higher than they were a few years ago, prospective returns are much lower by definition, and the possibility of greater volatility is very, very high," said Giordano Lombardo, Group Chief Investment Officer at Pioneer Investments in Milan.
NAVIGATING MINEFIELDS
For asset managers setting out views at Reuters 2015 Investment Outlook Summit next week, the temptation is simply to diversify portfolios as much as possible and buy a selection of hedges as buffers for a bumpy ride.
Deflation, or at least persistent 'low-flation', looms large over every fund, even as academic estimates suggest the world is as indebted on aggregate today as it was before the credit crisis seven years ago. But so does the chance of more monetary stimulus from central banks, should economic fears intensify.
Nowhere has this been truer than in Europe, where annual euro zone inflation has slumped to near zero as the region's economic recovery has juddered to a halt again. But even in faster-growing Britain or the United States, inflation remains below 2 percent targets as wage growth stays stagnant.
"'Lower for longer' will be the name of the game. This view determines our stance on asset allocation," said Marino Valensise, chair of Barings Asset Management's Strategic Policy Group.
It's this thinking that partly explains why benign equity forecasts of 12 months ago proved accurate, despite a gradual withdrawal of Fed bond buying all year and amid leftfield political shocks from Ukraine to Syria and Iraq and even West Africa's Ebola emergency.
Real economic and revenue growth has been hard to come by, but continued cost-cutting ensured 10-12 percent rises in annual profits on Wall St and in Europe through the third quarter.
Developed market equities, meanwhile, have returned more than 8 percent so far in 2014 - with a 10 percent dollar surge helping U.S. stocks outperform again as U.S. investors mull staying at home.
Deeply negative commodities and buoyant government and corporate bonds reflect a clear disinflation theme, even if that's harder to square with gains for emerging and frontier market equities of between 6 and 12 percent.
Ten-year Treasuries, as seen in October's wild swings, caught most people out and have again returned more than 8 percent, while assets as diverse as German bunds and Shanghai A shares are both up more than 13 percent.
"You should be as diversified as one can be - not least because you cannot take full protection in cash," said Lombardo at Pioneer. "This then changes the colour of bonds in the portfolio. You may hate Treasuries, but with such low returns everywhere else and a need to diversify, then they find a place."
(Editing by Kevin Liffey)