The investment committee’s investment committee here gives an idea of the economic and financial development in 2015. The bids are largely the expression of the main scenarios that the committee has as a framework for the work within the long term to create a continued attractive risk-adjusted return for wealth management investors.
One of the most obvious themes is the falling oil price, which is positive for consumers and negative for the oil-producing countries. Another important theme is Russia. How does the country tackle the consequences of the sanctions, the low oil price and, not least, how does Putin react to the massive pressure? On the more positive side, US growth appears to be at least 3 percent in 2015, which will be good for the shares and for the global economy.
The game about the oil price
The supply of oil is currently greater than demand, but at the latest meeting of OPEC at the end of November 2014, the oil-producing countries could nevertheless not agree to reduce oil production, so the oil price has since fallen to about $ 50 a year. barrel. The disagreement in OPEC is due, among other things, to a political power struggle, where Saudi Arabia wants to push countries like Russia and Iran financially in relation to the interests that Saudi Arabia has in the Middle East.
The very significant drop in oil prices in recent months has already had far-reaching consequences for the global economy. The oil-producing countries are hit on the revenue side, as the majority of countries in their state budgets have calculated an oil price over $ 100.
This can lead to increased indebtedness and lower growth to the detriment of the global economy. But on the other hand, the lower oil price is beneficial for the availability of consumers and businesses, which can increase demand and growth while keeping inflation low. In 2015, these various developments around the world will show their strength and set the agenda.
Russia is hard pressed
Another theme that will affect 2015 is the massive challenges that Russia faces, partly as a result of the West’s sanctions, and partly as a result of the low oil price. The Russian currency, the ruble, has fallen more than 50 percent during 2014. It has created a deep crisis, as the price of the goods it can still import is rising sharply. At the same time, exports are hit by sanctions. In December, the Russian central bank set the interest rate significantly up to 17 percent.
The latest analyzes indicate that Russia will see a 5 percent fall in growth in 2015. Russia is hard pressed for its state budget as a result of the low oil price, but the country has significantly stronger finances than in 1998 when it went bankrupt. One of the biggest risks is whether Putin will react to the pressure by stepping up military and creating inner peace by drawing outer enemy images.
Thus, it is planned that 2015 will also be a year with many challenges to be tackled, but the most important thing is to keep your head cool and gaze firmly at the basic positive conditions that drive growth. There will be ups and downs in the financial markets, but this does not change the fact that wealth management believes overall that 2015 will be a good stock year driven by, among other things, growth in the US, low oil prices and low interest rates.
I. US growth in good shape with at least a 3.0 percent increase in GDP
Growth in the United States really took off in 2014, when on average more than 246,000 jobs were created each month, which reduced unemployment to 5.6 percent. The forecasts show a growth of 2.2 percent in 2014, which can easily prove slightly higher when the final figures come at the beginning of the year.
In October, the US central bank closed its bond buy-back, and the market estimates that the central bank will begin to raise its key rate by mid-2015. If so, it is a sign that the US economy has become self-sustaining and thus come free of the financial crisis.
The sure signs of progress will continue to be job creation. In recent years, the US labor market has shown a sideways movement in wages, while many new jobs have been created. Several analysts believe that the lack of wage increases is due to restraint on the part of employees after the tough financial crisis. If the job creation continues as Formuepleje expects, rising wages and thus inflation will conceive. Wage increases will testify to greater self-confidence among US consumers and pull up consumption growth.
Among the companies, two important factors remain in the accounts that need to be watched: Revenue and new investments. In 2014, the quarterly accounts showed revenue growth. It will be crucial for the shares’ continued progress that revenue will increase further in 2015, as the companies are so trimmed that it will have a direct effect on the bottom line. But the ultimate sign of optimism and progress will be read from the companies’ new investments because this will be a sign that the companies are investing in continued growth in revenue.
Formuepleje expects that the growth experienced by the US economy in 2014 will continue into 2015. In isolation, the effect of the low oil price alone can give rise to a growth of 0.6 percent annualized, with the largest effect being in the fourth quarter of 2014 and at the beginning of the second half of 2015. In addition, the expected revenue and investment growth in the companies and the continuing decline in unemployment will result in expected total growth in GDP of at least 3 percent in 2015.
II. European growth continues in drag trains in 2015 – below 1 percent growth
Europe is still severely affected by the aftermath of the financial crisis. Lending to companies from European banks remains low. In 2014, the European Central Bank (ECB) lowered the key rate below zero but acknowledging that it is not enough to boost growth and inflation, the Bank has established various liquidity programs with the aim of increasing the incentives of commercial banks to increase lending to especially small and medium-sized enterprises. These programs are expected to be executed in 2015.
The southern one of the Eurozone, France, Spain, and Italy is still struggling with low growth, debt, and high unemployment. The debt crisis in Greece remains a stone in the shoe for the euro and the stability of the eurozone. At the same time, the need for reforms is large in large parts of the EU. Unfortunately, the countries have neither the political will nor the ability to implement the necessary and painful labor market reforms, pension systems, and more. The sanctions against Russia are another obstacle to increased growth in the Eurozone, where particularly the Eastern European countries, France and Germany are hit hard. The prospect of reducing the sanctions is currently far out in the future, although especially France would like to see a decline.
In 2015, the expected low oil price will overall be positive for Europe and be one of the factors that can pull up growth – seen in isolation with approximately 0.4 percent annualized. In addition, the positive effects of a strengthened US dollar – just as the negative contribution from the Russian crisis was of a non-recurring nature, with the majority of the effect deposited in 2014. All in all, Formuepleje does not expect a growth in the Eurozone’s total GDP of more than 1 percent.
III. The German ten-year government interest rate will rise
For the past year, Formuepleje has expected long-term interest rate increases, but this year has had to recognize that interest rate increases are still beneficial. Currently, the leading German ten-year government rate is at an extremely low level of around 0.54 percent. Theoretically, one cannot rule out the fact that it falls further, but given the extremely low level and expectations of rising US interest rates, it is most likely that the long European interest rate will climb upwards over the next two years. How much and when is uncertain as there are many opposing factors in play. But wealth management will continue to protect investors’ wealth against the negative effects of rising interest rates.
One of the uncertainties is related to the effect of the monetary policy measures that the European Central Bank is working on in 2015. Several analysts disagree on the effect of the bond purchases, and whether the pumping out of money to commercial banks will affect the long-term interest rate upwards or downwards. Therefore, wealth management expects that short-term interest rates will remain low and unchanged in 2015 and that inflation will remain below 1 percent in 2015 as well. However, wealth management expects that, by and large, rising long-term US interest rates will partially push up the corresponding European interest rate. Property management has hedged the part of the bond portfolio that is exposed to interest rate increases.
IV: The US Central Bank begins raising interest rates in the middle of the year
Property management expects that the US central bank will, in the middle of the year, slowly and in line with the strength of the US economy, set the short-term key rates. It will be good news for the economy and for the stocks in particular, as it will be a strong signal that the US economy has become more self-sustaining and that monetary policy can return to more normal conditions. However, this may mean that the market reacts with nervousness and increased volatility towards the new conditions for monetary policy. The central bank is very conscious of the fact that interest rate increases must not reverse the growth of the economy, but that this must be done in a balanced and gentle manner as the key economic indicators continue to show strength.
Q: The US dollar exchange rate will continue in 2015
In 2014, the US dollar rose against DKK from NOK 5.45 to NOK 6.77. The increase is due to increased growth, that the interest rate differential can be expected to increase between the US dollar and the euro, and that the European Central Bank can be expected to increase its balance sheet relatively more than the US central bank.
In 2015, the dollar will continue to grow as growth picks up and US interest rates rise. Property management, therefore, predicts an increasing dollar, which can easily rise above DKK 6.50 during the year. All in all, wealth management expects a higher dollar rate at the end of the year.
VI: Global shares increase at least 10 percent during 2015 measured in Danish kroner
Formuepleje expects another good stock year, where the low oil price will be a significant player. For large exporting countries such as China, a low oil price is positive partly for the country’s trade balance and partly for the companies’ costs. Both in the US and in Europe, the low oil price will have a positive impact on consumer disposable income and act as a tax reduction. The effect on growth in the US as a result of the low oil price is approximately 0.6 percentage point extra growth on an annual basis. The low fuel prices will even increase the incentive to commute longer for a job.
All in all, this will have a positive effect on consumption growth and thus many companies’ earnings. Another shareholder for the share prices is the low level of interest rates, which means that investors will continue to turn to equities in order to achieve a fairly acceptable return. Viewed from a historical perspective, the shares are fairly priced.
This means that continued price increases must primarily come from the companies’ ability to increase revenue and thus earnings. The return on normal stock years is approximately 8 percent, but Formuepleje expects the low oil price to push further so that we land at least 10 percent and maybe even slightly higher. Among the most important uncertainties is the risk of geopolitical turmoil – especially focused on Russia and the Middle East. This will give rise to fluctuations in stock prices, but wealth management also believes that the financial markets will become accustomed to a generally higher level of geopolitical turmoil.
VII: Emerging markets stock markets will continue to be interesting investment areas
The time when you could cut emerging market landings over with one comb is over. In recent years, we have seen how the differences between the countries become larger and larger, and Formuepleje expects that the difference between the least and the best performing emerging market countries in 2015 will be at least 25 percentage points. But overall, investment in emerging market countries is interesting, as there is a higher expected return potential than developed countries.
Among the leading countries are China, India, Brazil and Russia. We see the various developments clearly in the returns that the stock markets in the respective countries have delivered in 2014. Measured in Danish kroner in 2014, the Russian market is down by about 38 percent, while the Indian market is up by about 35 percent.
The Brazilian market has fallen by about 13 percent, while the Chinese market is up around 54 percent. Overall, the index for emerging market shares is slightly positive by a couple of percents. A very heterogeneous development, which Formuepleje expects, continues into 2015.
However, it emphasizes that as an investor it is important to be very selective. Currently, Formuepleje’s share portfolio is neutrally weighted in emerging market equities. In the longer term, wealth management expects that emerging market shares will outperform equities in developed economies, so Formuepleje expects a moderate overweight of emerging market shares in 2015.
VIII: The oil price stabilizes, but remains below $ 70 a day. barrel in 2015
Oil prices are determined by supply and demand, but it is not a free market. The imbalance became evident to everyone, as the Oil Exporting Organization (OPEC) organization in November 2014 decided not to reduce the oversupply which since summer has lowered the oil price from around $ 110 to below 50.
The low price has consequences for those countries whose state budgets depend on a high oil price and for those companies that have earnings in the oil industry. Especially Norway is hit hard, but also countries like Russia, Venezuela and Iran suffer from the low oil price.
Property management believes that there are several factors in play. Partly, the increased production of American shale oil is involved.
There are great forces at stake, including the United States, which soon becomes a self-sufficient oil producer, has become less dependent on OPEC and the other established oil-producing countries. A continued low oil price over several years may change this situation, which has been upset by shale oil production in the United States in recent years.
At the same time, Saudi Arabia plays with the economic muscles towards Russia and Iran in relation to the country’s political interests in the Middle East. At present, therefore, it is a process of exhaustion, which Formuepleje does not assess, will be resolved in 2015, so we expect the oil price to remain below $ 70 this year.
IX: Continued high level of geopolitical turmoil that will cause greater fluctuations in financial markets
There is still turmoil and unrest in the world. In Asia, Japan and China are in conflict with the rights of some islands located in the waters between the two countries. North Korea pops up regularly and makes its mark. Terrorist action throughout the world will still give attention to the Taliban and Islamic State (IS), and the war on IS in Iraq is only in its initial phase and can easily be stepped up. In addition, there is a long civil war in Syria and turmoil in many other places in the Middle East and North Africa.
But the biggest single uncertainty factor for the geopolitical turmoil in Russia, which is more than hard-pressed by the low oil price, sanctions, the sharply falling Russian currency and the prospect of rising unemployment.
The low oil price hit hard in Russia, which has a very large oil sector and a state budget, which is dependent on an oil price above $ 100. The interest rate has been sharply increased to prevent capital flight, inflation is rising sharply as import goods have risen sharply in price, and the demand for domestically produced goods has increased as a result of the sanctions. Growth in Russia is therefore expected to be negative in 2015 by approximately 5 percent, which inevitably means rising unemployment.
There is a great risk of internal turmoil and demonstrations, which President Putin may fear, will evolve as we saw in Ukraine. This can happen despite the fact that 85 percent of the population backs up Putin. One of the methods Putin can use to curb social unrest is to maintain and expand the image of an outside world that will hurt Russia. But the situation is unstable, and it cannot be ruled out that eastern Ukraine’s activity is stepping up and that further attempts are being made by the Russian side to mark its power against the West. Asset management expects at least a few larger shorter or longer dives of more than 7.5 percent in the stock market triggered directly or indirectly by geopolitical turmoil. But we will also see that the market will increasingly be able to get used to the increased level of geopolitical turmoil. The long-term investor should look through these anticipated corrections and invest in accordance with his risk profile and investment horizon.