Finalising my thoughts on what 2015 holds for investors, I reminded myself of what I said a year ago. Doing so brought to mind a television series that was popular in the late 1970s; Tales of the Unexpected always ended with an intriguing twist. There have been more than a few of these so far in 2014.
Some things did go according to plan, so let me start with a couple of Tales of the Expected. The first thing I got right was the continuing leadership of the US stock market. Despite increasingly punchy valuations, investors have rightly viewed the US as a haven this year.
The measured tapering of stimulus, steady recovery in the housing market, falling unemployment, improving deficits, increased competitiveness as a result of shale oil and gas and a rising US dollar have provided a benign backdrop. The S&P 500 is 300 points, or 16 per cent, higher than it was at the end of last year. Backing Uncle Sam has been a good call.
You don’t need to be a genius to predict more of the same in investment markets, however. More interesting is what didn’t happen as predicted. So what were 2014’s Tales of the Unexpected?
The unexpected bond tale
One prediction that did not eventuate this year has been the bond market. Government bond yields were expected to rise at the beginning of the year, putting downward pressure on prices. The opposite happened as the expected rise in interest rates was pushed ever further into the future. Only a few months ago, the Bank of England was expected to raise rates as soon as this month. Now it looks like next November is a better bet. The Federal Reserve may have stopped asset buying but Japan, followed perhaps by Europe too, has expanded its program. Corporate bonds have done even better, following government bonds higher and then adding a bit more on top to reflect a lower risk of company default as well.
The unexpected Abenomics tale
The second thing I underestimated was the impact of Japan’s sales tax hike. To be fair, I highlighted it as a headwind for Abenomics, the three-pronged attack on 20 years of stagnation and deflation. But like most observers I thought a post-hike reduction in activity would be short-lived. The postponement of next year’s follow-up increase and an expansion of the Bank of Japan’s stimulus programme means the Nikkei is 6 per cent higher than at the start of the year and will probably go further. But the slump in the value of the yen has more than wiped out this year’s gain for a UK investor.
The unexpected oil tale
The third unexpected move has been the collapse in the oil price. Yes, I was cautious on the outlook for commodities in general, thanks to China’s ongoing slowdown, but I didn’t expect oil to fall from US$115 a barrel to under US$80 today. This disinflationary shock has actually been a net benefit to investors because, while there are clear losers from sliding commodity prices (Russia, Brazil, South Africa), the winners are more important to global markets. US consumers have as much as another $1,000 a year to spend thanks to lower petrol prices.
Finally, 2014 produced a couple of surprises – tales of the totally unexpected. At the beginning of the year, my list of risks included: a blow-up between Japan and China; an escalation of the eurozone crisis; and quicker than expected monetary tightening. My list did not include the destabilisation of Ukraine or a killer virus in west Africa.
I guess that is the point about tales of the unexpected – and about investment. We only know what the twist was when the credits are rolling.
