Good morning, with the renewed onset of volatility in equity markets I thought I’d take the opportunity to say a few words about our view of equity markets in 2015. This is ahead of our monthly note that is due out next week which will cover this area in greater depth.
Against a backdrop of falling commodity prices, downward revisions to growth from the World Bank and geopolitical tensions it is easy to see why markets are having a rough ride at present. However it is my view that higher volatility is symptomatic of a changing in the pattern of world growth that rapid commodity price changes bring about. The most appropriate parallel here is with 1998. That year commodity prices (GSCI) halved, UK and US were approaching full employment and the dollar was in the middle of a six-year bull run. We have drawn parallels with this year for our house oil forecasts – this is a more appropriate comparator than previous episodes of deflation where the (bad) deflationary forces have stemmed from a lack of demand rather than a supply side adjustment (good deflation) which is what we are living through today.
Now as in 1998 (where Brent hit $9/bbl) the impact for oil importing countries is overwhelmingly positive. For counties like Russia, Nigeria and Venezuela the situation is markedly different. Again in 1998 the Russian default led to a quadrupling of volatility on the S&P500 in H2 however in spite of this the S&P ended the year up 27% – despite a 15% correction at one point. Despite this the S&P remained however three years away from its cyclical peak – and was supported by a strong domestic jobs market and rising disposable incomes. Much as it is today.
So what are implications for the UK? Well as I think is fairly well understood if you strip away Resources stocks from the FTSE All Share the index has tracked the S&P almost step-for-step over the last six months. And I expect US consumer to take strength from rising disposable incomes to offset the impact of shale and traditional oil-related activity. So to conclude the UK and the U.S. stand apart in the developed world economy – not least because of their differing demographic profiles – and we forecast both economies to grow at between 2.5 and 3.0% in 2015. This should lead to Sterling and Dollar-denominated assets attracting international support from emerging markets flight from risk.
For investors I continue to recommend opportunistic buying into markets as worries coalesce at regular intervals. Next on the radar will be the ECB press conference (22/1) and the Greek elections (25/1) where the focus will shift to European politics – a very different outlook – and any contagion should be taken advantage of. While we continue to favour the technology and pharma & healthcare sectors we like domestic travel and leisure firms who stand to benefit from rising disposable incomes in 2015.
There will a more substantive note covering this view out next week – also covering why I think the General Election will have limited impact on the UK economy short of triggering a risk event. In the meantime please give me a shout if you want some charts that sit behind those trends I’ve covered.
Senior UK Economist
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Panmure Gordon & Co One New Change | London | EC4M 9AF | United Kingdom www.panmure.com