Markets 2015

Markets 2015

December 2014



With diverging policy, political unrest and market volatility to the fore, uncertainty looks set to prevail

Volatile Market Mix for 2015

Divergences in growth and monetary policy around the world are expected to lead to a more volatile market mix in the coming year. In this special report, experts from across BNY Mellon Investment Management and its affiliates present their views on what to expect in major capital markets for 2015 and why an active, flexible approach to investing will be more important than ever.

BNY Mellon Chief Economist Richard Hoey expects the global economy to continue to expand, despite some short-term disruption as policy normalization progresses in the U.S. Portfolio manager James Lydotes of The Boston Company, however, believes that U.S. interest rates may remain “lower for longer,” perhaps even until 2020 because of ongoing weakness in the U.S. economy. One area where continued weakness in the U.S. can be seen is the choppy recovery of the housing market. Boston Company research analysts Carl Guerin and Raphael Lewis don’t expect 2015 to feature a snapback recovery that housing experienced after recessions in the mid-1970s and early 1980s and 90s.

Unlike the U.S., the Eurozone is warding off deflationary pressures, but there are nonetheless likely to be investment bright spots for discerning managers. Paul Hatfield, Chief Investment Officer of Alcentra points out that opportunities for direct lending to small and medium-sized European companies will grow in the new year as increased regulation and higher capital requirements compel banks to reduce lending.

Urban Larson of Standish Mellon Asset Management points out that emerging market debt may feel the effects of developed market central bank policy shifts keenly. He believes investors should look to sovereign and corporate issuers that are less dependent on the cheap international financing that has been so abundant.

With reduced liquidity and a strengthening dollar, differences in fundamentals across emerging economies may matter more in 2015. Amy Leung of Newton is watching the progress of China’s shift to domestic consumption after 30 years of export-driven growth. She sees a slowdown in 2015 as reforms proceed, but still expects China to successfully re-engineer its economy in the longer term.

Brazil in 2015 offers another example of the increasingly varied states of health among emerging market economies. Solange Srour, chief economist at ARX Investimentos, BNY Mellon’s Rio de Janeiro-based investment affiliate, says hoped-for reforms that could benefit investors may be at odds with the agenda of newly reelected President Dilma Rousseff.

Currency is another source of risk investors may want to pay closer attention to in 2015. Charles Dolan and Elena Goncharova of BNY Mellon’s Investment Strategy and Solutions Group* expect currency volatility to make a comeback, as monetary policy diverges around the world.

However, Iain Stewart of Newton and Jack Malvey, Chief Strategist at BNY Mellon Investment Management, both say that investors should focus less on seeking opportunities created by monetary policy and more on factors such as corporate earnings and geopolitical risk.

*BNY Mellon Investment Strategy & Solutions Group (“ISSG”) is part of The Bank of New York Mellon (“Bank”).


04  Trading Places

Raman Srivastava, Standish and
Holger Fahrinkrug, Meriten

A growing divergence between US and European bond yields reflects the shifting strategies of global central banks.

06  Policy Divergence Won’t Derail Expansion

Richard Hoey and Jack Malvey, BNY Mellon

The long-anticipated normalization of monetary policy by the Federal Reserve and Bank of England could finally arrive in 2015.

08  U.S. Rate Rises Are Not a Done Deal

James Lydotes, The Boston Company

The consensus expectation is that the Federal Reserve will raise U.S. interest rates, but the Boston Company’s infrastructure portfolio manager, James Lydotes, thinks differently.

10  Policy Support May Offer Illusory Benefits

Iain Stewart, Newton

Iain Stewart, who leads Newton’s Real Return team, examines the reasons for the team’s reluctance to invest in assets that have benefited from the policy actions of the authorities.

12  Currency Volatility

Elena Goncharova, BNY Mellon Investment Strategy and Solutions Group and
Charles Dolan, BNY Mellon

Currency volatility has been subdued in recent years as many investors have increased allocations to international assets.

14  Bond Conundrums – Finding Value

April LaRusse, Insight Pareto

Although interest rate hikes are expected in 2015, the timing of such action is an unknown while the extent of a market reaction (or lack of one) when it happens is a mystery.

16  Across the Spectrum

Paul Hatfield, Alcentra

Against a low interest rate backdrop, Paul Hatfield, chief investment officer and head of the Americas at the Alcentra Group, takes an upbeat stance on credit and loan market prospects despite some market concerns about the potential for overheated valuations and deteriorating credit values.

18  An End to Corporate Hoarding in Japan

Simon Cox, BNY Mellon IM Asia Pacific

In 2014 investors enjoyed a welcome break from several years of fretting about ‘mountainous’ public debt in the mature economies.

22  Emerging Market Debt: Potential Fallout from U.S. Monetary Policy

Urban Larson, Standish

Historic links between the performance of U.S. Treasuries and emerging market debt make the actions of the U.S. Federal Reserve an important consideration in analysing the asset class, according to Urban Larson, Standish senior product specialist, emerging markets debt.

24  U.S. Housing Stands on Firmer Ground

Carl Guerin and Raphael Lewis, The Boston Company

With the U.S. housing economy still in recovery mode more than six years on from the peak of the financial crisis, what do the coming years hold for U.S. housing and what role do the so-called ‘millennials’ have to play in this story?

26  Holding the Faith

Amy Leung, Newton

After years of rapid economic development in China, stellar growth has given way to growing market uncertainty as markets look towards 2015.

28  Dilma’s Dilemma

Solange Srour, ARX Investimentos

In the Brazilian elections in October 2014, after a long and fraught campaign President Dilma Rousseff won a narrow victory. Political uncertainty may have subsided but with the Brazilian economy in the doldrums and commentators banging the drum for harsh reforms, what are the prospects for the dilapidated poster-boy of South America?


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