A World of Over-Supply: the Annual Reassessment

  • We explain how what was unexpected in 2014 has modified the framework of our investment strategy.
  • The paradox of the disturbances of 2014 is that they have led us to the interpretation that the post-2008 equity bull market can extend for another two-three years, to 2017. What has made the difference is the change in the price regime: the emergence of super-low inflation in DM. It prolongs the low cost of capital which underpins the leadership of growth assets.
  • The emergence of a strong US$ since last summer marks the third phase of the post-2008 investment cycle characterised by lower, more normal returns on investment in US equity. The global redistribution of investment risk has been confirmed. 2014 is the year of the triumph of the global consumer relative to the global producer. The contribution to corporate profitability in trans-Atlantic markets of the global growth theme is in decline. Growth leadership is becoming more domestic and regional in nature.
  • The primary investment argument for European equity is that of profitability return-tomean and catch-up with America. The combination of improved monetary transmission, exchange rate depreciation and lower energy costs should produce a reversal of the current downward trend of expectations for nominal GDP and EPS growth in the euro area from Q2. We are not yet ready to embrace the bullish consensus. Q1 could be disruptive. We expect the break-out from the current phase of equity market consolidation-correction to occur in the spring.