Your portfolio in 2015: $1,000 gold, US bulls, banks

While global stocks look set to finish the year in positive territory, with the Dow industrial average breaking through 18,000 just before Christmas, investors trying to plan for the new year warn markets are currently in a state of flux “bordering on disarray”.

Some of the major themes of this year — including a consistently strong U.S. dollar, slumping commodity prices and diverging global monetary policies and economic fortunes — have created real headwinds for investors While these trends can present a more challenging market environment for many, they also create opportunities.

Here’s a look at some of the main strategies asset and wealth managers suggest for your portfolio for the coming year.

U.S. markets hold the key
By far the strongest conviction investment strategy for 2015 is U.S. markets, with an overwhelming number of asset managers predicting further strength in equities and the U.S. dollar. The revival of the U.S. economy has been a key theme for 2014 and a stronger greenback is expected in the coming year. After all, there is a lot more scope for appreciation as interest rates start to rise and economic growth continues.

“Markets are currently in a state of flux bordering on disarray. To put it in context, the dollar index—a measure of dollar value against a basket of foreign currencies—is currently only testing levels that we last saw four or five years ago. Pre-financial crisis, the index was markedly higher than it is now,” said Paul Amer, portfolio manager for the multi-asset strategy group at Insight Investment.

“Dollar strength has been an important theme in our portfolios and we have benefited from long U.S. dollar positions against a number of other currencies, including the euro and the yen,” he said.
The U.S. is also likely to lead the way for earnings growth, with JPMorgan Asset Management expecting mid-single digit pace in 2015.
“Can the U.S. ‘go it alone’ in 2015? In many ways, this is the most important question for next year, because without the U.S. the global growth picture for 2015 is not particularly inspiring. If the U.S. does continue to go it alone, we should expect U.S. assets – equities, credit and the dollar – to perform,” said chief investment officer of Threadneedle Investments, Mark Burgess.

Go short on commodities
After “powerful” price corrections, investors may be tempted to re-establish long positions in commodities, but U.S. dollar strength is likely to sustain the underperformance of commodity benchmark returns when compared to equities, according to strategists at Deutsche Bank.
If Brent crude oil prices fall below $60 a barrel on a sustained basis, it will likely imply significant default risk across U.S. high-yield energy companies, the bank said.

At the same time, the implications of a lower oil price are also “cascading” into the bank’s precious metals outlook.
“On the assumption that OPEC keeps production at current levels, we believe the fundamentals of the oil market will remain weak for at least the next six months,” said head of commodities research at Deutsche Bank, Michael Lewis.
“We expect this fundamental backdrop will sustain the pressure on OPEC to cut production either at their next meeting in June 2015 or before,” he said.
The bank are also maintaining a bearish outlook for gold, as adjustments in U.S. interest rates, equity and currency markets are all expected to be negative for the precious metal.
“If we are right and euro-dollar falls to 1.15 by the end of next year, then based on gold’s historical correlation with the dollar over the past six months, it would imply gold prices falling to as low as $1,075 per troy ounce,” said Lewis.
Heading into next year, the analyst community expects gold prices to average around $1,225, and unlike oil price forecasts, analysts have a relatively good track record in terms of predicting gold prices, he said.
“Even so, the possibility that gold prices fall towards $1,000 should not be viewed as extreme in our view since this would bring gold in line with historical valuations,” he added.

Not banking on bonds
The margin for safety in fixed income markets is now “wafer thin” as yields globally are as low as they have ever been and spreads are closing in on all-time highs, said head of the multi-manager team at Schroders, Marcus Brookes.

Traditionally fixed income does not do well in a rising rate environment and if the Fed hikes U.S. rates in 2015 as expected, every fixed income asset class “will take a hit,” Brookes said.

“In spite of this, judging by the scale of continued inflows, the majority of investors appear comfortable with the risk/reward set-up. We’re not, and therefore have only limited exposure,” he said.

“By definition, prospective returns today are pretty much as low as they have ever been, risks are high and liquidity is terrible. Investors need to tread carefully here,” he added.

Banks to outperform
The old reputation of banks as steady dividend payers is in tatters since the credit crisis, meaning investors have steered clear and shares have become “exceptionally cheap” said head of investments at private bank Coutts, Arne Hassel.
Globally, banks have only ever been cheaper about 5 per cent of the time since 1980, with European and Japanese banks looking especially attractive, as non-performing loans in European banks have peaked, Hassel said.
“Valuation alone does not justify investing. U.S. banks have been outperforming their global peers since early 2011, when non-performing loans (NPLs) began a downward trend.,” he said.
“Falling NPLs are a good first step, but banks also need to start lending again. Lending has been steadily growing in Japan since late 2011, while recent figures from the European Central Bank show lending picking up for the first time since early 2007. Meanwhile, U.S. loan growth is speeding up as economic tailwinds offset still-tight lending standards,” he added.

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