By Graham Harman, Senior Investment Strategist Asia Pacific, Russell Investments
The 2015 investment landscape could resemble the plot of The Hunger Games, where investors face a changing and unexpected environment that requires multiple talents and smarts to emerge victorious. Russell Investments’ overall expectations for 2015 are for global equity market returns of 5 – 10%, but we think some volatility could be ahead.
As we enter 2015, global cash rates are close to zero and bond rates both internationally and in Australia are close to multi-decade lows. The Australian share market delivered flat returns over 2014 (a price return of just +1%), and at the beginning of 2015, stands at levels which are still no higher than 2006. With patchy global economic growth and with Australia in particular facing a painful adjustment phase as the resources boom winds down, there’s no shortage of challenges to tackle.
What will it take to ‘win’ in 2015?
1. Recognise that investors may face relatively hungry times. Our expectations are for the ASX 200 to gain 3.5%, the 10-year bond rate to be3.5%, cash to be 2.25% and the Australian dollar to be worth the equivalent of US $0.75. Cash rates in most regions of the developed world will remain close to zero, with increases projected in the US of 1%. Global equities and bonds are projected to return 10% (hedged) and -2% (hedged).
2. Be prepared to adapt quickly to changing market conditions. “May the odds be ever in your favour” is a popular catchcry from The Hunger Games, highlighting the element of chance. This saying may provide little comfort, but a lot can be done to tilt opportunities in your favour. For example, our 2015 expectation is that both international equities and global high-yield debt securities will deliver returns of 5% – 10% (after hedging back to Australian dollars). However, the range of likely returns around those forecasts (the ‘standard deviation of return’) is large: plus or minus 20% for shares, versus a well-behaved plus or minus 5% for high-yield debt.
3. If you choose freedom, you must accept the risk. Your risk profile is important in determining whether you are able to access well-valued assets that may take time to pay off, or whether you need to be more prudent with your investment choices. As we enter 2015, we observe stretched global equity valuations; a US Federal Reserve system preparing for higher official interest rates; pressure in commodity markets and in some emerging economies; and a continued winding down of the resources boom that has underwritten the Australian economy for so many years. Be mindful of the investment risks you take and maintain a long-term perspective of your goals and risk tolerance.
4. You may need to search further to gain returns. In 2015, the local Australian economy will have to deal with weaker commodity prices and collapsing resource capital spending – problems potentially compounded by a downturn in the housing cycle. Investors looking to gain exposure to economies that are in a more dynamic phase of the economic cycle will therefore need to consider markets in the Asia-Pacific region, within the Northern Hemisphere developed world, and in the emerging world more generally.
5. Be alert for opportunities. In an environment where nothing is as it seems, the lead character in the The Hunger Games, Katniss, remains on guard to access valuable supplies. Likewise, given the unpredictable investment landscape, one of the lessons of 2014 was to stay diversified across a full range of asset classes. We expect more of the same unpredictability in 2015. In this environment, active management becomes especially important – investors must have wide-ranging sources of opportunities, an eye for making timely decisions and a nimble process.
The bottom line: Believe that adversity offers an opportunity to do your best.
Even if the financial markets resemble The Hunger Games in 2015, it’s possible for investors to weather twists and turns by having a diversified investment mix and making wise choices based on their long-term goals.
