The annual poll of member investment company fund managers found an overwhelming positive sentiment for the year to come with almost 91 per cent of saying they expect markets to broadly rise in 2015.
Europe was by far the most favoured region after being cited by 39 per cent of respondents, followed by the US at 22 per cent and Asia Pacific excluding Japan at 17 per cent.
European equities have been one of the worst performing developed markets, with Japan, Europe and the UK being the markets showing similarly lacklustre returns until the past week. The US has been a clear winner for most of the year and is up more than 15 per cent.
Performance of indices in 2014
Source: FE Analytics
Neil Birrell, chief investment officer at Premier Asset Management, said: “In the short and medium term there is likely to be increased volatility in markets as we are at a stage when there are major economies moving in different directions.”
“Some asset classes and markets do not have much margin for error, but overall the world economy is growing, corporate profitability likewise and markets do not look overstretched on a long-term view.”
Paul Niven, manager of the £2.7bn Foreign & Colonial investment trust, agrees, saying he expects more upside from markets before rates start to rise and has differing outlooks in certain regions.
“Europe offers reasonable value and poor – but hopefully improving – growth prospects and high operational leverage. The US offers less compelling value but more solid fundamentals and higher quality earnings in general,” he said.
“Japan looks to be a case of more of the same, with QE a dominant driver of returns, although signs of short term over-optimism may again be evident from foreign investors. The UK looks set for another bout of political angst which may well hang over the market for the foreseeable future, not welcome at a time where the steam seems to be coming out of the economy.”
However, Niven says emerging markets offer the promise of the best growth with current attractive valuations but he believes there will be a better entry point in the near term.
Over 30 per cent of managers expected interest rates to remain low next year, which was the largest cited cause for optimism. Other reasons to expect markets to do better were an increase in company earnings cited by 13 per cent and the falling price of oil, strong balance sheets, and confidence in continued government intervention in the macro economy, which each won 9 per cent of votes.
Approximately 74 per cent of managers expect equities to outperform other assets in 2015, 9 per cent expect commodities/natural resources and commercial property to outperform and just 4 per cent cash think cash is the place to be.
However on sectoral basis there was very little consensus for next year with financials, manufacturing, resources – including oil – and smaller companies each gaining 12 per cent of manager votes. Last year a huge 38 per cent of managers favoured smaller companies.
Large ‘blue chip’ companies were the least favoured area of the market with just 4 per cent of managers, compared to 24 per cent last year.
Managers did highlight potential risks to equities for next year: 41 per cent think the weakening of developed economies is the greatest threat to equities for next year, while deflation was another concern for 18 per cent, followed by UK election worries, recession and Russia/Ukraine difficulties – all 9 per cent.
Alastair Mundy (pictured), manager of the Temple Bar Investment Trust, said: “We see a number of concerns around the world. These concerns range from geo-political worries to fairly disappointing earnings growth for companies worldwide, and, of course, the end of quantitative easing in the US. All of these factors suggest that equity valuations should not be as high as they are.”
He tips complementary assets such as gold, gold equities, Norwegian krone, cash and index-linked bonds, both US and UK, as being useful if stock markets start to fall back.
“We cannot be absolutely positive that these complementary assets will rise if equity markets fall significantly, but we are hoping that they will dampen volatility if equity markets become more volatile,” Mundy added.
Andrew Bell, chief executive of the £1.5bn Witan Investment Trust, expects equities to make progress in 2015, but the recent drop in the oil price will be a major headwind for developed economies and Asia.
“Although there are bound to be pockets of pain (oil producing economies, bonds issued by small oil companies) in aggregate we have just seen a major income transfer from oil producers to energy consumers, which is likely to buoy consumer spending and assist corporate margins in the year ahead,” he said.
“There will be a point of vulnerability later in 2015, once the markets have shifted to take account of this stimulus and are looking for reasons to take profits.”
