Introduction
While the US Federal Reserve looks set to raise interest rates later this year, the European Central Bank (ECB) is ever closer to launching a programme of quantitative easing (QE) to fend off deflation in Europe.
The Bank of England is yet to determine when it will set interest rates on an upward trajectory but some predict it will be later in 2015 and certainly after the US raises its rates. This year will also be a test for Japan’s government, following the Bank of Japan’s decision to boost its QE programme.
Yet again, economists and strategists are embracing the word ‘divergence’ as the central banks of Europe, the US, the UK and Japan head off in different monetary directions.
John Greenwood, Invesco Perpetual’s chief economist, notes: “A striking feature of the next year or two will be the marked divergence in the monetary stance of central banks in the US and the UK on the one hand, and Japan and the eurozone on the other.”
BlackRock’s global chief investment strategist, Russ Koesterich, agrees that divergence will be a major theme for 2015.
He says: “First is the relative economic strength and less accommodative central bank policy in the US, in contrast to weaker growth and more aggressive monetary policy in the rest of the world.
“This has several investment implications, including the prospect of a stronger dollar. Should the dollar continue to appreciate, that would exert more downward pressure on commodity prices.”
He believes investors should be looking to markets where monetary policies are creating favourable economic conditions, such as in Japan, as well as developed and emerging markets in Asia.
Stewart Robertson, senior economist at Aviva Investors, points out: “Global economic output is expected to expand by roughly 3.5 per cent this year, which would be close to its historical average, but this relatively favourable picture masks some significant regional variations.”
He cautions that economies, and therefore monetary policies, are to remain “de-synchronised” this year.
“While rates are likely to rise in both the US and UK, further monetary easing is on the cards in Europe, Japan and possibly China too,” says Mr Robertson.
The upcoming general election in the UK will create an uncertain investment environment in the coming months. So too will regulation of the financial services industry, which is still hanging over banks and investment firms in 2015.
Steven Bell, chief economist at F&C Investments, warns this uncertainty is set to “cast a shadow over UK markets”.
“The government that is likely to emerge after the UK general election, and the policies that result, are highly unpredictable,” he adds.
Mr Bell insists European equities will perform well under the ECB’s “ultra easy” monetary policy that is expected to be announced by president Mario Draghi. But he emphasises: “The eurozone’s problems are far from being solved and the region is certainly not yet strong enough to withstand another global recession.”
For investors, the challenge will be how to ride out global monetary policy to capture returns in 2015.
Ellie Duncan is deputy features editor at Investment Adviser
