Global equities deliver healthy returns in 2014

Source: JP Morgan Asset Management

December was a month of profit taking for global stock markets, following a strong fourth-quarter rally. In local currency terms, the MSCI World Index fell 0.8% in December and rose a healthy 9.8% for 2014 as a whole. The star performer was the US, where equities were flat in December but soared 12.7% in 2014. In Europe, political uncertainty over the looming Greek elections and subsequent government policy, together with continuing anxiety over eurozone deflationary pressures, caused the MSCI Europe Index to fall 2.1% in December. Sweden (up 0.6%), Belgium (flat) and the Netherlands (down 0.5%) proved better safe havens than either Germany (down 1.5%) or the UK (down 2.3%). The pain was predictably greatest in the periphery, with Portugal, Italy and Spain all falling by at least 4%.
The impact of the strong US dollar remained significant for all international markets. This was most visible in Japan, where in local currency terms returns were close to zero in December and up 9.5% for 2014. However, due to the weaker Japanese yen, Japanese equity returns in US dollars were much less attractive, down 1.4% for the month and down 4.0% for the year. This currency effect was also significant for emerging markets, with returns for 2014 up 5.2% in local currency terms but down 2.2% in US dollar terms. In local currency terms, the best performing emerging markets were Egypt, Turkey, Indonesia, the Philippines and India, which all rose by over 26%. Conversely, the worst performers were Greece (down 32%), Russia (down 13%) and Hungary (down 13%).

Key asset allocation themes for 2015
As we start 2015, the big investment themes look similar to last year, but the details are materially different:
Global growth prospects look modestly better in 2015
Our forecast for strong growth in the US in 2015 is core to our view that global growth will modestly accelerate this year. Recent US economic data has been encouraging, notably further gains in payroll employment and an implied increase of above 4% in household wages in the fourth quarter of 2014. All of this suggests that December’s strong retail sales are likely to continue in 2015, with an additional boost to disposable income provided by the lower oil prices. Overall, we expect US GDP growth of 3.0%-3.5% this year, with US companies likely to continue to set the gold standard for delivering earnings-per-share (EPS) growth on time and on target. These forecasts include market estimates for a 75 basis point interest rate increase in 2015. Equity investors are taking the US Federal Reserve’s (the Fed’s) comments at face value, and assume that any interest rate increase is growth-dependent and that real rates will remain low in absolute terms. Therefore, domestic earnings growth momentum creates a benign environment for US equities to move higher over the next 12 months.
Conversely, for Japan and the eurozone, central bank stimulus remains key to equity performance in 2015, as deflation remains the main macroeconomic threat. Of note, J.P. Morgan Investment Bank’s GDP forecasts are similar for both economies, with around a 1.5% increase year on year. Overall, while global growth will remain uneven in 2015, and the impact of divergent monetary and fiscal policies will be more emphatic (see below), we see GDP growth accelerating in the US, Japan and eurozone. Overall, J.P. Morgan Investment Bank forecasts global GDP to increase 3.0% this year. This should be supportive for equity performance.