It has certainly been a topsy-turvy year for investors in 2015, with nearly all asset classes posting hefty drawdowns at some stage over the past eight months or so.
Let’s be honest though, it hasn’t been too surprising that returns have been harder to come by. We are, for example, now into the seventh year of a rally in equities while bond yields have fallen substantially since the crisis thanks to central bank policies such as quantitative easing and ultra-low interest rates.
Nevertheless, given we are heading into a time of year where trading activity increases as those market movers return from their holidays, we thought it would be interesting to highlight the industry experts we have spoken to who have called the market correctly so far in 2015.
Of course, these predictions could all turn out to be completely wrong by January 2016 with the potential for higher interest rates in the US and UK, along with the ongoing rumblings in the eurozone and China.
However, here are five predictions – and the experts who made them – which have turned out to be correct.
“Europe funds will rally” – Psigma’s Tim Gregory
We start off with one of 2014’s most hated markets – Europe.
The average fund in the IA Europe ex UK sector had a torrid time of it last year as the threat of slowing economic growth and potential deflation (coupled with stellar gains in 2013) meant the peer group lost 0.94 per cent with a lot of volatility.
However, while concerns continued to rage about the threat of a crippling Japanese-style debt/deflation spiral, Tim Gregory – head of global equities at Psigma – expected European equities would rally on the back of QE from the ECB.
“We think European equities will do better this year against a tough backdrop,” Gregory said in early January.
Immediately after Gregory’s comments, European funds did indeed rally and considerably outperformed global indices up until the end of March.
Performance of sector versus index after Gregory’s after comments
Source: FE Analytics
Of course though, Europe has returned to being the perennial source of bad news for global markets with Greece’s future causing a headache for investors around the world along with significant falls within the continent’s equity markets.
However, before you decide if Gregory just got lucky, it is worth pointing out that he was only expecting a snap rally and then volatility to return.
“Whereas over the last five years it has always been right to buy stocks on weakness rather than always selling on strength, we now think we are in a flatter environment and it will be prudent to take profits in markets when you see them.”
“We will do that if European equities, as we expect, do rally strongly in the months ahead.”
“Bonds will sell-off considerably” – Schroder’s Marcus Brookes
Schroder’s Marcus Brookes was one of many experts who found themselves on the wrong end of bond trade in 2014, as yields almost inexplicably fell despite the very real concern that a three decade-long rally in fixed income was coming to an end.
Nevertheless, thanks to a whole lot of selling in the final months of 2013, soggy economic data, geo-political tensions, the threat of deflation and equity market volatility, developed market government bonds delivered double digit returns.
This hurt Brooke’s MM fund range, as he had positioned for the complete opposite.
“Our own view was that government bonds would be the first to show weakness,” Brookes said in December last year. “At the beginning of the year they were yielding 3.25 per cent and today they are yielding 2.2 per cent, so I think that goes down as being the wrong call.”
Nevertheless, he remained steadfast in his view that fixed income was grossly overvalued and prone to significant correction.
“The thing is I don’t think they can go down from 2.2 per cent to 1 per cent as QE has ended – whose is going to buy these things at 2 per cent.”
Investors will no doubt realise that, although 12 months late, Brookes’ initial prediction has since paid off as government bond yields started to spike in April this year thanks to improving economic data, increasing inflation expectations, a kickback against negative rates and a lack of underlying liquidity meaning investors were hit by uncharacteristically high drawdowns.
Performance of indices since April 2015
Source: FE Analytics
What’s worse, with the expectation that rates will soon start rising in the US, many feel bond prices could fall even further before the year is out.
“Unloved small-caps will rebound” – Hargreaves Lansdown’s Mark Dampier
Following their stellar gains in 2012 and 2013, 2014 again turned out to be a difficult one for UK small-caps as investors looked to de-risk their portfolios in the face of growing macroeconomic headwinds and toppy valuations.
It meant that by the time we spoke to Mark Dampier – head of research at Hargreaves Lansdown – in March, the FTSE Small Cap index was down 1.63 per cent over the previous 12 months, compared to a double digit gain from the FTSE 100.
On top of that, the IA UK Smaller Companies sector had seen net outflows in each of the previous nine months, according to the Investment Association. All in all, £766m had been redeemed over that time and that figure increased to £1.2bn by May.
Dampier said all the selling was a tad over the top as while an uncertain general election was on the cards, there were reasons why smaller companies could come roaring back.
“They’re unloved, unwanted and unfashionable at the moment. When they bounce back I don’t know, but historically they’ve come back 30 or 40 per cent very quickly. It’s proven a good accumulation opportunity in the past,” Dampier said.
Again, since Dampier made those comments, smaller companies have indeed bounced back – certainly relative to large-caps.
Performance of indices since Dampier’s comments
Source: FE Analytics
A number of reasons have been given for that trend, such as the certainty of the election result and the improving economy, while FTSE 100 stocks have struggled due to falling commodity prices and concerns emanating from Greece and China.
“The oil price will fall further” – Argonaut’s Greg Bennett
While you could say Dampier’s comments amounted to “what goes down must come back up again”, Argonaut’s Greg Bennett’s view on the oil price in April 2015 was the complete opposite.
Thanks to a variety of reasons such as slowing emerging market growth, the shale gas revolution in the US and OPEC’s decision to not step in and manage the market, the oil price had been in free fall up to that point as it was down some 40 per cent in the 12 month’s prior to the article.
While some were betting on a sustained recovery to the $80 a barrel level, the European equity manager was less than optimistic given demand wasn’t increasing and on and offshore storage facilities were filling up fast.
“As the US rapidly utilises its conventional storage capacity, near term oil prices will need to fall further to incentivise alternative and more expensive sources of storage, such as floating storage and production shut-ins,” Bennett said.
Performance of index since Bennett’s comments
Source: FE Analytics
As the graph above shows, the oil price has indeed fallen since (it is now down to its lowest price in six and half years at just $41 a barrel).
While the lack of onshore storage facilities will have certainly played a part, fears over China’s economic slowdown and the recent agreement with Iran have also contributed to those falls.
“Get out of Russia funds now they have bounced back” – Hermes’ Gary Greenberg
This final prediction is intrinsically linked to the previous one, given the Russian economy’s reliance on oil.
Like the oil price, the Russian equity market had been in free fall in late 2014 as the cheapness of the commodity had significantly affected investor sentiment towards the region and caused the country’s authorities to hike interest rates to 17 per cent.
However, as so often is the case, investors were initially rewarded for buying in when concerns toward Russia reached crisis levels as its equity market snapped back strongly at the start of 2015 delivering returns of close to 50 per cent by April.
While he had to deal with losses of close to 20 per cent in his first week of being in a Russia fund, FE Trustnet’s own Joshua Ausden was one investor who managed to play the upswing.
However, with the Russian market seemingly in recovery mode, Hermes’ Gary Greenberg warned that investors should take their profits and run given that nothing had actually happened in regard to an improving economic backdrop.
“Unlike China and India, Russia is not modernising through structural economic change. Its market may rally sporadically on positive headlines – a higher oil price, a trade deal with a neighbour – but its real economic promise is unlikely to be realised without root and branch political reform,” Greenberg said.
“Until then, we will see only false dawns.”
Performance of indices since Greenberg’s comments
Source: FE Analytics
Since then, the index is down close to 20 per cent. And if you were wondering, yes Ausden did manage to sell-out before the falls.