Growth and liquidity will support equities

We continue to strategically favour risky assets:

• Economic surprises positive for first time since February 2014.
• Investors have high expectations regarding the coming ECB meeting on January 22nd.
• From a valuation perspective, equities are still attractive, especially compared to bonds.
• Euro zone equities should outperform in 2015, supported by a gradual economic recovery, earnings growth and the euro depreciation.
• We have increased our high yield and emerging debt exposure, as they offer the best carry-to-risk ratio.

Cross asset strategy

Liquidity will remain key to equity returns in 2015. While the Fed has already stopped increasing its balance sheet, both the ECB and Bank of Japan will further increase theirs. Those measures will continue to support equities.

Meanwhile, fundamentals have become even more important than ever over the past month in our positive scenario on equities versus bonds. Economic growth should finally start to accelerate and earnings will have to deliver. Our global economic scenario has not changed. We still presume that global economic growth will eventually gradually pick up, supporting earnings especially in the euro zone, where any economic growth increase will have a positive impact on profit margins, and thus earnings.

As equity returns are historically correlated with growth and liquidity, accelerating growth and more liquidity increase the probability of positive equity market returns, as shown in chart 2.

Valuation is far from excessive

From a valuation perspective, equities are still attractive, especially when compared to bonds, whose yields are still near their all-time lows. Consequently, the dividend yield from equities is, in many cases, more attractive than bond yields, giving even bond investors a fundamental reason to increase their equity exposure.

Positive medium-term scenario

Our medium-term, cross-asset scenario of somewhat better growth, supportive global financial conditions and a moderate increase in interest rates remains intact, and is clearly favourable to risky assets.

REGIONAL EQUITY STRATEGY

Room for positive surprises in the euro zone

We continue to favour euro zone equities over US equities

We continue to favour the euro zone over the US, not only based on its more attractive relative valuation, but on multiple other grounds.

• Even though the economic recovery in the euro zone should improve gradually, we notice growth is not yet priced in. Based on a longer-term risk premium in line with the historic level and 1% long-term real economic growth, we estimate an upside potential of more than 20%.
• Earnings should start to deliver, supporting the euro zone market. In fact, they have already started to improve. Q3 2014 was the best earnings season since 2011. Any economic growth increase will have a positive impact on profit margins, and thus earnings growth.
• The euro and oil price depreciation will be favourable.

Moderately positive on emerging markets 

Although emerging markets seem to be bottoming out, it is difficult to have a clear view on them as a region. There is a lot of dispersion among the different emerging countries, sectors and individual stocks. Various macroeconomic forces are in play here, such as the commodity price decline and economic policy divergence. Valuation looks appealing, but is being pulled down by China and the energy and financial sectors. As dispersion is here to stay, an active stock-picking strategy is the best way to play some emerging countries.

Positive on Japan

FIXED INCOME STRATEGY

We have increased our high yield and emerging debt exposure

On the fixed income side, we expect a moderate interest rate increase. In anticipation of interest rates going up, we are maintaining a below-benchmark diversification and a strong diversification out of government bonds.

High yield and emerging debt offer the best carry-to-risk ratio (risk-return measure: yield-to-maturity divided by 1-year volatility). Therefore we have decided to slightly increase our exposure to global high yield and emerging debt in hard currency.

COMMODITIES STRATEGY

Too early to be positive on commodities

Although probably much of the bad news on excess supply and lower global economic growth has already been integrated, it is still too soon to become positive.

Oil: will continue to largely depend on OPEC’s decision on supply. Currently, the anticipation of a strong inventory increase continues to weigh on oil prices.

Some Base metals such as copper, zinc and nickel, are in better shape now, with supply deficits from 2016. This could support prices in 2015.

Finally, gold prices are negatively correlated with US real interest rates, which should increase in 2015. However, for the time being, the pressure from real interest rates has eased, and thus also the pressure on gold prices.