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Besides a drop in crude oil prices, growth concerns in key economies like Russia, China and Japan dotted the economic and financial market landscape in 2014. The most important issues in the year to come will be how low oil prices will fall and how much a rebound is likely, global research and investment advisory firm CLSA says in its recent report, ‘Global Themes 2015: Best ideas in US and Asian equities’. In the Asian region, it maintains an ‘overweight’ stance on India.
Oil prices, according to CLSA, are expected to touch a low of $50 a barrel before a rebound in the second half of 2015. The average price (Brent) in 2015 will be $70 a barrel, it suggests.
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Despite general belief that the US will increase its interest rates in 2015, CLSA expects monetary conditions to be accommodative and a number of key Asian markets to see rate cuts. Lower oil price will support trade balances and lower inflationary pressures. The dollar will continue to see an upside, while China’s growth will get slower and India’s pick up, the report says.
Of the reform markets, CLSA expects Japan, Indonesia and India to see the most significant improvements in returns on invested capital (ROIC). CLSA maintains an overweight rating on India, the Philippines, Thailand, Hong Kong, China and Taiwan, and remains underweight on Australia, Korea, Malaysia and Singapore.
In terms of specific stocks in India, CLSA’s top high-conviction ‘buy’ ideas for 2015 include Bharti Airtel, Grasim, ICICI Bank and Infosys, while its high-conviction ‘sells’ are Hindustan Unilever (HUL) and BHEL. At the global level, “value” has been the worst-performing style in 2014, underperforming in both developed markets (DMs) and emerging markets (EMs). However, this trend is likely to reverse in 2015, as ongoing monetary easing in DMs supports markets, CLSA says.
“Global growth remains anaemic and the related scarcity continues to support quality and growth styles, which were the best performers this year. However, investors should be mindful of the stretched valuation of quality stocks, already due for a correction. On the other hand, we continue to favour growth stocks, given the scarcity, and do not see any pick-up in global earnings growth, which has averaged around five per cent over the past couple of years,” the report says.
CLSA expects Asian earnings growth to accelerate in 2015, supported by multiple drivers, such as bottoming gross domestic product growth, ongoing political reforms and lower prices of commodities, especially oil. With margins poised for a cyclical rebound, growth should be more than 10 per cent in 2015, after averaging only seven per cent over the past couple of years.
Economy
CLSA’s Eric Fishwick, head of economic research, expects the US Federal Reserve (Fed) to increase rate in mid-2015, and then follow up with a 25-basis-point increase every quarter. This, though, will not be the end of asset inflationary monetary conditions, and asset inflation will continue in 2015 and 2016, he says.
However, CLSA’s managing director & equity strategist, Christopher Wood, has a contrary view. He believes weak retail sales in the US in October, and inflationary expectations, are likely to trigger a fourth round of quantitative easing (QE4).
The bizarre mix of Keynesian and monetarist mindset running policy in the Western world continues to view all ‘deflation’ as self-evidently bad. Policymakers, Christopher Wood believes, can be expected to maintain a preference for central-bank balance-sheet expansion so long as this threat is perceived to exist or to be increasing.
“The deflationary threat will be perceived to have increased in the US if the dollar breaks above the key resistance level of 89-90 on the US dollar index. The weakness of commodities, including oil, adds support to the deflationary thesis. The five-year forward break-even inflation rate is now at 2.23%. On the two occasions in recent years when this rate has declined to the 2% level, Fed has reinitiated a balance-sheet expansion. This is why ‘GREED & fear’ believes QE4 is more likely in 2015 than a US rate increase,” Wood says.
He adds: “In case Fed does announce an increase in the funds rate, it is more likely that the long end of the US Treasury bond market will rally on the announcement and not sell off as expected by conventional analysis.”
