In the sixth-century BC, poet and philosopher Lao Tzu observed the following: “Those who have knowledge don’t predict. Those who predict don’t have knowledge.”
I agree with Mr. Tzu and don’t presume to be a seer, yet despite his wise words, I will be providing my top 5 “predictions” for the global markets in 2015. Why? because the notion that the financial future is not in any way predictable is just too unpleasant a thought for the romantic (all true investors are romantics are they not?).
Here are some predictions for the public markets in 2015:
1) Non-energy related South-East Asia and Latin America will help boost global growth estimates
Latin America is going through a very unique demographic environment. On the one hand, Latin America is seeing an increase in its aging population. In 2000, the number of seniors (60 and up) in Latin America was approximately 43 million and by 2020 it is expected to be roughly 83 million. However, there is also incredible growth in young middle class workers. In 1990, there were 170 million workers aged 15-35 and in 2010 that number grew to 280 million. By the year 2020, that number is expected to reach nearly 300 million. Moreover, the largest portion of that growth is expected to be amongst women, who currently comprise over 100 million in the workforce.
In 2014, many Latin American economies had a very good year. The Argentinian stock market rose nearly 54% and Colombia was near full productive capacity. In fact, growth in countries like Peru and Colombia have made it difficult for these nations to curb inflation. Colombia has grown the fastest in 2 years with its GDP growing at 6.4% from a year earlier and Peru has seen an increase in its GDP of 4.9% from a year earlier. A lot of this growth is due to infrastructure as public works spending in Colombia grew 24.8% from a year earlier.
Nations like Vietnam are also seeing incredible growth. Vietnam grew 6.96% in the latest quarter beating all estimates. Exports are surging and retail sales are rising drastically with 10.6% growth from a year earlier, which could rise more due to lower energy costs. Moreover, Thailand is seeing record consumer spending (albeit from increased household debt and the Bank of Thailand’s commitment to low rates) but this has allowed the economy to grow faster than normal. In fact, the entire Southeast Asian region is seeing record levels of consumer debt which I believe will continue to accelerate as interest rates and inflation remain low (inflation in Thailand decreased to 1.26% last quarter), creating more growth than previously estimated.
Overall, expect to see rising consumption in Latin America especially on big purchase items like automobiles. The Latin American consumer is shifting towards more ‘convenience’ so consumer staples with strong brands will play an essential role in the region. Global growth according to the IMF is expected to be 3.8% in 2015 but expect to see growth slightly above 4% due to these region specific catalysts.
2) Sectors to watch: Global Healthcare
This leads me to my next prediction, which is the continued growth in global healthcare. Mexico is seeing a drastic increase in demand for healthcare with a rapidly ageing population but is having difficulty keeping drug administration costs low. This dynamic creates a ripe environment for large generic manufacturers to enter the region. Moreover, companies like Pfizer and AstraZeneca are making sizeable investments into Latin America via acquisitions as they are betting on continued growth in the demand for pharmaceuticals given shifting demographics. Companies like Stericycle and ResMed will also be increasing their exposure in Latin America, particularly in Brazil. Asia is also a significant growth catalyst for pharmaceutical companies as incomes are rising among an expanding middle class. India is also of note as it is experiencing a rise in the demand for healthcare which is evidenced by the recent surge in Indian market focused, Mumbai headquartered Sun Pharma’s earnings. Finally, the USA looks promising as there will be reliable growth in demand for healthcare caused by the ageing baby boomers and the requirements of the Affordable Care Act (think ETFs like VHT and CURE).
3) Europe will see better than expected stock market performance
A bit of a contrarian prediction perhaps, but I remain “carefully” optimistic about Europe’s economic prospects and expect some surprise upside in 2015. Although 2014 was supposed to be the year Europe made it safely out of the fire of the debt crisis, several factors held it back. The first was a slowdown in China and emerging markets, the second was the impact of the Russia-Ukrainian fiasco (think of the big impact on the German economy) and the third and most significant was the inability of Euro governments to remove the structural barriers which make the rebalancing of Euro economies difficult.
These “structural deficiencies” include poor institutions to streamline the restructuring of private sector debt, high corporate and personal taxes, entrenched special interests such as unions and political patronage networks, corruption and stifling bureaucracy. These factors make investors and businesses uncomfortable and thus without their removal the creation of any new cycle of growth will be improbable.
How difficult is it for Euro Governments to address these problems? Reform is proving to be very difficult as such deficiencies cut to the core of European culture itself. Thus, as we are seeing in Greece, European nations will have to ask themselves what kind of vision they have of their societies moving forward and deciding may take more time and more pain.
Nevertheless, I believe these negative catalysts are outweighed by the positive catalysts which are ECB stimulatory measures, lower interest rates for a prolonged period of time, a weaker Euro, a banking sector more flexible with its loan policies and lower commodity prices.
In addition, there is an “elephant in the room” that no one seems to be talking about. After seeing record stock market returns in the S&P 500, many feel that US markets are overvalued and ripe for a major correction. There is no doubt that companies today are more expensive than they were in 2009-2010, but consider the fact that the MSCI Emerging Market Index ETF is currently trading at a paltry 11.2 projected trailing 12 month PE and the MSCI All-World Index (excluding the US) is down 6.2% for the year. Thus, investors will be looking for value outside the US in favour of the developing world and Europe which may cause a surprise rise in European markets (think quality European companies like BUD).
4) Oil will remain weak
With the recent drop in energy over the past few months, and with Saudi Arabia warning that they “may never see $100 barrel oil” again, it seems that there are too many catalysts in play which will prevent oil from getting back to triple digit territory. To be clear, I don’t bet on the price direction of a fixed dollar investment like oil (or gold or silver or any commodity for that matter) since that is a dangerous game, but with current output levels relative to demand, commitment to OPEC market share, technological innovation, a slowing China, Japan in recession-mode and new pipelines in areas like Kazakhstan, I don’t expect oil to be above $100 at year end; for a short position think ETFs like ERY and DWTI. Many funds and traders are betting on the rise of the Canadian energy sector which took a massive beating at the end of the year, and if oil were to rise to $65-$70 that may be a good ‘trade’. However, with oil still in sharp decline and with these new fundamentals intact, I don’t expect to see oil back at what it was at in the beginning of 2014 and thus “playing” the Canadian oil sands could be a particularly painful gamble. Instead, I view oil lower for longer which may amount to a considerable tailwind for many companies with significant operating costs (think airlines, tire manufacturers, chemical companies).
5) Volatility is back
As of the date of this writing the VIX, the most popular measure of volatility which focuses on the stock market (it measures the cost of options which can be conceptualized as the price investors are willing to pay to insure against sudden market moves) is up around 10% for the year. If we consider a chart of the VIX at its peak around 2008 until today there are only two slight spikes (2010, 2011) and from 2011 on it has been relatively smooth as the S&P 500 has marched forward with broad gains for most stocks. This relative calm can largely be attributed to supportive monetary policy (QE and low interest rates) as equities slowly marched back to pre-recession levels. Yet in 2015 the narrative has changed. Equities are widely believed to be fully valued with investors looking at any slip in earnings to justify a selloff and the Federal Reserve has ended QE and is prepared to begin normalizing interest rates. Add to the mix concerns about global growth, an oil shock and a potential geo-political confrontation or two and 2015 looks to be more bumpy indeed.
Originally posted on: Seeking Alpha