Naughty, not nice
Dollar-based investors won’t find many goodies in Santa’s sack
CHRISTMAS tends to be the season of goodwill and investor optimism. A poll of fund managers by Bank of America Merrill Lynch (BAML) in December 2014 found that most expected stronger economic growth and low inflation in 2015. Investors were enthusiastic about equities (particularly in Europe) but negative on government bonds.
The consensus is often wrong and this was no exception. Not every bet soured, but most predictions went in the wrong direction. Global economic growth has disappointed once again, although largely thanks to a poor performance by emerging, rather than developed, economies. Forecasts have been steadily revised lower. The OECD’s latest estimate for global growth in 2015 is 2.9%, well below the average rate over the past 30 years, of 3.6%.
When it came to predicting the best-performing asset class of 2015, investors had little doubt. Two-thirds of managers picked equities and just 4% government bonds. Alas, in dollar terms, equity investors have lost money (see chart). As of December 15th the total return from shares in the developed world (in dollar terms) was -1.4%. Government-bond markets have also suffered a small loss, roughly on a par with that suffered by equities. Those who put their money into the benchmark ten-year Treasury bond actually eked out a small gain.
Investors who opted for more exotic assets generally did badly. Emerging-market equities did terribly, with a negative return of 17.3% (including a calamitous 32% drop in Latin America).
Those who bought high-yield bonds also lost money. To be fair, fund managers were pessimistic about commodities a year ago and, boy, were they right: gold fell by 10% on the year and the Bloomberg commodity index dropped by 26%.
European and Japanese investors had a better time of it than their American counterparts.
Euro-zone stockmarkets were up in local currency terms, as were shares in Tokyo. The decline of both the euro and the yen against the greenback means that these markets performed badly in dollar terms. But it also means that the international portfolios of European and Japanese investors look more profitable in local-currency terms (less so, of course, for those who hedged their currency exposure).
For dollar-based investors, this has been a disappointing year. Even the good news—a sharp fall in the oil price—has not been as helpful as might have been expected. Lower petrol prices have acted as a tax cut for Western consumers, spurring developed economies. But they are hardly booming. And the weakness of energy prices has put a dampener on investment (commodity producers were responsible for 39% of global capital-expenditure growth in 2014), and caused some wobbles in the corporate-bond market.
Corporate profits have also been affected. According to Société Générale, a French bank, fourth-quarter profits at S&P 500 companies are likely to have fallen by 3.6% year on year; even without financial and energy stocks, profits would be up by just 0.1%. In the absence of higher profits, stockmarkets need higher valuations if they are to generate positive returns. But Wall Street started 2015 on a cyclically-adjusted price-earnings ratio of 26.8, compared with the historical average of 16.6; it ends the year, according to Professor Robert Shiller of Yale University, on 26.6.
Investor sentiment has taken such a dent that, so far, December has failed to produce the traditional “Santa Claus” rally that drives up shares in the final weeks of the year. Perhaps the Grinch has stolen it. The much-anticipated tightening of monetary policy by the Federal Reserve, expected after The Economist went to press, may also have induced caution.
The latest BAML survey suggests investors are not quite so upbeat about 2016 as they were about 2015. More still think the global economy will strengthen than weaken and only 7% foresee a global recession. But China’s economy is a big cause for concern, with a net 43% of fund managers expecting weaker growth there. Forecasts for profits growth are at their weakest since July 2012.
Despite those worries, investors are pretty much making the same bets. They are heavily overweight in equities (particularly European ones) and underweight in government bonds and commodities.
That is not a completely coherent position. If commodities collapse further, that should help keep inflation low, which ought to be good for government bonds. And the big bet on equities may be a sign of desperation, not confidence: the prospects of every other asset class look dismal by comparison.