2015, Mid-Year Financial Market Report: - Global Aspects in Overview

PART TWO

Outlook for 2015

General Tendencies

Money & Pixies

As America’s recovery grows,

Europe pains and Asia groans

”Look at my gains!” investors moan

Will the year move along these lines?

“Pixies and economies” also rhymes…

Rainer 2015.

What Trends and Drivers in 2015?

Most of the text and data in the report has been prepared at the end of December 2014. I thought that I would have to update a lot for this mid-year report, especially because I sensed that the second half will not be quite as benevolent as the first half. ALL UPDATES ARE IN RED. The fact that there are not many changes, should tell you something about the reliability of the research, and the researcher.

Synopsis for 2015

         Industry experts state their outlook as “Cautious “to “Neutral” to “optimistic”!  Hardly ever do these guys say anything more specific, either because they don't want to be called out or because regulators tell them to no raise hopes of inexperienced investors.  

    All well and good, but I don't mind being called to task, - and I would be surprised if anyone is that naive to follow a blogger's market ideas, without checking his credentials. 

    My research suggests that 

• the global economy will be like sweet & sour “rojak” (fruit salad). 
• Thanks to cheap oil, shoppers will be inclined to spend more. 
• The Federal Reserve will tighten US interest rates – later. But threats of a hike could tempt markets to bolt!
• Europe hopes for no deflation, no Greek exit or triple-dip recession, fingers crossed. 
• Asia's economies are stronger than ever: Chinese, Japanese and Indian economies lead the rest.

Seven Drivers that matter

Seven drivers provide a lot of controversial indications. It’s a mixed bag for investors! How to get hold of the “chocolate” without getting creamed? 

Expectations are high, again. Emotions run high, too. We say, “Markets are expensive, many uncertainties, more still under the surface, headwinds… Volatility is a big headache and there are no guarantees.”

We dither. 

Every year, we play a similar mind game, do we not?

In order to get to the “chocolate” and keep it, you need to know WHERE and WHAT to invest in. As to when, the best time to invest is ...

Former New York Mayor, Michael Bloomberg put it nicely on CNN on June 19th, 2015, regarding his $100 Million contribution to a new technology park on Roosevelt Island in New York to rival Silicon Valley: 

 “To succeed we should not worry too much, whereabouts we are with the economy. For a good future, you invest every day.”

Market Drivers - in Short

Markets are influenced (largely, but not exclusively) by  

•  Fiscal & political decisions
• Economic health & outlook
• Geopolitical tensions

Fiscal and political decisions

Liquidity has been the most closely watched aspect for investors. It has many names and takes many forms: Quantitative Easing or QE for short, “Twist” (US),“TLTRO” (EU),  “Abenomics” (Japan), Low [or ZERO] interest rate policy (ZIRP). It has been practised around the world since 2008. 

Liquidity drives ‘Real Asset’ prices higher.

A good example are oil prices. From a peak of $142 in 2008, oil prices go through a rollercoaster ride, falling to below $40 in 2009. Every time a new QE is introduced the USD loses buying power and oil prices go higher from there, till they are back up to $110 in 2011. At the end of the QE 3, coinciding with the last tranche in the third quarter 2014, oil prices fall dramatically, as the US dollar regains its strength.

Liquidity, when increased, effects different outcomes from when it is being reduced. That is nothing strange and rather straightforward. Yet, we still get caught in the problem phases!

For each stage of the increasing liquidity section there is an opposite stage on the ‘decreasing’ side. But essentially, the handicap with increasing liquidity is inflation, and deflation, when liquidity is taken off the market. Hence, it requires careful management as both drivers have positive and negative implications.

What does Liquidity do, (apart from driving prices higher)?

If there is abundant liquidity, people live on easy credit. Everything and anything is financed. “Bah Humbug” to higher prices, - “Everyone gets more”. “Investments can only go up”. “It’s a Win-Win Thing”, so they rave.

When the liquidity crunch comes, doom & gloom spreads, people stop spending, (and investing!) and worry about “how to keep up with the Joneses”. It’s behavioural science. And so human, too.

0% Interest Rates is really scraping the liquidity barrel. It is the floor, below which we are paying our own interest on top of bank and investment charges.

Where interest rates are low, financing your life style might seem easy, but getting a return for your investment is a high risk matter. 

Life assurance, for example, is a typical industry that relies on a risk free return of around 3%. If it cannot attain as much then its business plan is in tatters. It needs to choose between two alternatives: "go for assets that are higher risk" or – "charge clients more". Managing the challenges sets the scene in the drama of "The-best-company-wins". 

Getting too comfortable with low interest rates often results in above average dependency on overdrafts and loans. When the tide turns and interest rates go up, the careless ones will suffer a whiplash-like experience. Suddenly, your interest payments double, triple…

Who is affected?

Banks, mortgage companies, insurances, pension funds, income trusts, fund managers, company budgets, household budgets, You and I, and the people next door.

Geopolitical Tensions on the Rise

Sanctions on Russia in retaliation of their involvement in Ukraine crisis don’t just do damage to the Russian economy, it also affects world trade, and Europe in particular due to the close proximity. A return to old cold war dividing lines, spiced up by renewed fight over oil or energy in general creates new front lines and a potentially very costly race toward military supremacy.

Escalating violence, political instability & terror from Afghanistan to Tunisia, and almost every country in between threatens to drag the world into a “new” kind of confrontation, one that cannot be defeated by military means, or dilettante diplomacy. It is another learning curve but not without precedence. The Northern Irish religious fronts are one such example, still divided by a veritable wall. Going back in European history, there is the period of the crusaders, which was fought on similar religious pretexts.

Of late, we can add the struggle of the “destitude and harassed" in war zones and impoverished regions, believing that in Europe or any other developed country life is a lot easier to be had, until they get there… In the meantime, scores sacrifice the little they own, and too frequently, risk - and lose - their lives in the course.

Market Drivers

Global Economic Health - Overview

Realities for major regions

For in-depth outlook into potential investment opportunities in individual countries, asset classes, sectors and strategies, please click on the relevant link.