Q1 2015

Economic and asset allocation views covering Q1 2015

14 January 2015

Keith Wade

Keith Wade

Chief Economist & Strategist

Introduction

Concerns over global growth came to the fore at the beginning of the fourth quarter with both equity markets and bond yields falling sharply. Once again central banks came to the rescue as policymakers in the US and eurozone indicated that they were prepared to increase liquidity should activity drop away as many seemed to fear. In Asia, we saw both the Bank of Japan (BoJ) and People’s Bank of China (PBoC) ease monetary policy. Equity markets and risk assets rebounded whilst bond yields came down further in response to expectations of interest rates staying low for longer.

Meanwhile, the decline in the oil price which had begun during the summer gathered momentum as Saudi Arabia refused to cut production in response to the glut in the market. No longer willing to play the swing producer, the Saudi strategy is to drive higher cost producers out of business with the focus on US shale. Markets are currently taking a pessimistic view of this development with risk assets selling off once again. Clearly, energy stocks and credits have been hit, but this needs to be balanced against the benefit consumers and many corporates receive from lower energy costs.

At this stage, markets are in a dislocation phase which occurs whenever there is a sharp fall in a price linked to incomes. This phase could well continue until oil prices stabilise. Ultimately though we see developments in the oil market as creating upside risk for the world economy in 2015 through stronger growth alongside lower inflation.

In this quarter’s Perspective we take a look back at 2014 and a look forward with our themes for 2015. There are also more detailed pieces on oil prices, bond yields and long term (30 year) returns as well as a summary of our current asset allocation views.

Keith Wade, Chief Economist and Strategist, Schroders

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