What Could Fuel Equities Higher?

At an investment meeting in December, one of our CIOs asked, “What’s left in the tank for equities?” We believe corporate earnings growth will lead to another year of positive returns for the global equity universe. In addition, the dramatic slide in oil prices through the second half of 2014 has our investment teams around the world considering the vast impact of lower oil prices on regional economies, industries and equity markets. In our view, lower oil prices could be the fill-up that drives equities further.

Summary of our key views heading into 2015 Global equities could achieve mid to high single-digit returns in 2015, which is close to the long-term average returns and we believe will look attractive versus other asset classes.

Earnings growth will likely be the main contributor to equity returns, supported by an improving global macro environment and continued growth spending.

Diverging central bank policies, US dollar strength and the dramatic drop in commodity prices, notably oil, will also likely drive equities in 2015.

The US economy will potentially be one of the biggest beneficiaries of lower oil prices. However, current equity valuations reflect the strong fundamentals and suggest more modest returns for 2015.

We are more constructive on European equities than in our last outlook because expectations are low, easing is likely and euro weakness could boost exports and earnings.

Imbalances in China’s economy and slower-than-expected growth are turning China into a micro-driven market, from a macro-driven one. Low oil prices make us even more bullish on India than in 2014. Other consumption-led emerging market (EM) economies are also likely to benefit from low oil prices. Russia and other commodity-producing EM countries will likely feel a negative impact from low oil (Middle East) and commodity prices (Latin America).

We are less enthusiastic about the Information Technology and Healthcare sectors. Fundamentals are still strong, but higher stock prices leave less upside. We are more positive on the Financials sector, particularly in the US, where balance sheets are strong and banks are likely to benefit from rising rates. We are looking for opportunities in the Energy sector, which has sold off despite a wide variety of prospects and probable outcomes for different companies and industries.

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