What's in store for the markets in 2015?

Emma Powell brings you a round-up of where the industry thinks the FTSE 100 might end up in 2015, as well as a few outrageous predictions thrown in for good measure.

December 19, 2014

by Emma Powell

Expectations for the FTSE 100 were high as we entered the year, following a strong performance in 2013. However volatility returned to the markets in the latter part of the year, amid fears that economic growth in 2015 could disappoint.

We also saw resurgence in IPOs in 2014, raising $256.5bn, a 30 per cent increase in volume and a 50 per cent rise in value compared with 2013, according to professional services company EY. Chinese e-commerce giant Alibaba (BABA) saw shares soar as much as 38 per cent after it floated in September, giving it a £140bn value and making it the biggest float in stock market history.

In contrast an already disastrous year for Tesco (TSCO) was rounded off by management admitting full-year trading figures would be 20 to 30 per cent below expectations. Geopolitical crises in Ukraine and fears over the spread of Ebola also caused turbulence for travel stocks. But what’s in store for the markets in 2015?

Threadneedle Investment’s view

Threadneedle Investment believes one of the main tail risks for next year is if the deflationary trend, seen particularly in Europe during the recent months, turns into outright deflation. It believes if sovereign quantitative easing is implemented in Europe it could put downward pressure on the euro, helping Europe’s exporters and allaying some deflation concerns.

Japanese equities remain attractive thanks to a weaker Yen helping boost corporate earnings in the country, particularly for exporters. The size of the QE programme underlines the authorities’ commitment to allay deflationary concerns. Secular drivers such as the commitment from some companies to improve return on equity should help support Japanese stocks.

It continues to like UK equities and reckons the 3.3 per cent dividend yield should remain attractive in an environment where 10-year German gilts yield just 0.7 per cent. However current weakness in oil and commodity prices may dampen performance, given the market’s bias towards areas such as energy and mining.

The Share Centre’s view

The Share Centre is looking for the FTSE 100 to end 2015 at 7,100, with equities driven higher by strong growth in the US and a “healthy” UK market. However Helal Miah, investment research analyst at The Share Centre, said: “there are some concerns around global growth next year, particularly focused on China and the eurozone, which we still think is going to be problematic.”

He reckons large-cap UK companies will benefit particularly from exposure to the US. However it will be a different story for those exposed to the Euro, which is still weak against the pound. Poor demand in the region will also have an impact.

Some large M&A activity can be expected next year, particularly in the commodity and insurance sectors, with the primary aim of cutting costs.

The Share Centre thinks the government’s willingness to approve development as well as the UK shortage of residential housing makes the housebuilding sector promising next year. It is also confident in the insurance and engineering sectors. However commodities are expected to remain relatively weak.

Blackrock’s view

BlackRock expects the US to be one of the few major economies to accelerate in 2015. Financial conditions in the US and UK will tighten due to a pickup in growth and improving job markets. It reckons the Fed may start increasing rates as wages rise but halt its tightening cycle at a historically low level. However countries such as China and India will pursue looser policies as since growth is still at very high levels.

Divergence in the emerging markets will continue due to tightening US monetary policy and falling commodity prices. Satellites of the eurozone and Asia will probably import “dovish” monetary policies from the ECB and Bank of Japan respectively. On the other hand commodities producers such as Russia and Brazil may hike rates to defend their currencies from the strong US dollar.

In a world of low inflation and consequently sluggish profits growth, BlackRock expects share prices will be more sensitive to self-help action from company management. This was a major driver of our performance in 2014 and we expect next year to be no different. Self-help comes in many forms; a balance sheet to utilise, restructuring, non-core disposals or perhaps a period of heavy capex is coming to an end.

Merrill Lynch’s view

Merrill Lynch reckons the big story for 2015 will be inflation, or rather the lack of. However there will be considerable variation as to the how much this will bite across regions. In the US it expects imported disinflation to be offset by a modest rise in wage growth, leaving sore inflation flat at around 1.5 per cent.

At the other end, inflation in Europe will linger near zero. While Europe is expected to muddle through in the short term, if outright deflation develops, markets may focus on the region’s “dismal debt dynamics”. This could be problematic if the markets lose faith in the simulative powers of the ECB.

The bank thinks Russia will probably continue to cope with the implications of unrest in Ukraine. Forced debt redemptions, caused by sanctions, will probably contribute to oil weakness and may well push the economy into a 1.5 per cent recession next year.

For the past few years Saxo Bank has compiled a list of what it describes as 'outrageous predictions' for the year ahead, and this year is no different. Of course these are not intended to be accurate forecasts upon which you should act. Rather as chief economist Steen Jakobsen puts it, “by imagining the most negative scenarios and events, whether a Russian default, volcanoes spreading havoc, or an internet Armageddon, investors have a chance to stress test their assumptions about the future and what these events might mean for their own investments.” Actually, some of last year's predictions didn't turn out to be quite so outrageous after all - oil did indeed plunge, further than the $80 they'd suggested may happen as "producers fail to respond"; and the 'taper tantrum' that ensued as the end of QE drew into sight did mean currencies of the so-called 'fragile five' - Brazil, India, South Africa, Indonesia and Turkey - continued their tailspin against the US dollar.

1. In Russian a perfect storm brewing in the economy could either end in government-owned companies or with the government itself selectively moving into a default. Russian companies need to repay $134bn in debt between 2014 and 2015. While this is backed by $400bn in currency reserves, factors including an incoming current account deficit, Ruble intervention and close to no financing from capital markets means this could become petty cash.

2. Following the failure of Prime Minister Shinzo Abe’s three arrows to revive the economy and growth forecasts revised down for 2014-16, Japanese inflation spikes to 5 per cent next year. Incessant money printing by an increasingly dovish BoJ, which will buy around 60 per cent of any new government bonds, as well as equities and other assets, will fuel asset prices and price pressures.

3. In order to get a European Central Bank quantitative easing programme off the ground, President Mario Draghi quits before taking up a position in the Italian government. Italian Prime Minister Renzi needs a broadly accepted figure to replace President Napolitano, who wants to be out of office no later than June 2015. While a figure such as Bundesbank President Jens Weidmann takes over the ECB presidency in a quid pro quo deal that sees the Bundesbank allowing a QE-light programme to go ahead under the supervision of a German presidency.

4. Following the high-profile hacking of major retailers such as Target and Home Depot, which resulted in millions of customers’ credit card details being exposed, in 2015 hack attacks on e-commerce’s largest players becomes even more widespread. Amazon.com suffers a 50 per cent decline from an overvaluation following a shift in sentiment as it suffers low growth rates, even if it itself is not a victim of hacking.

5. The UK housing market crashes next year, with prices falling by as much as 25 per cent. The BoE is moving closer to its first rate hike since 2007, putting pressure on mortgage rates and in turn household finances, which have already been undermined by weak wage formation. In addition, the quick rebound in house prices may induce a wave of selling from households struggling to make ends meet. This especially the case in pricey areas like London, where prices have surged.

6. Ukip joins the Conservatives in a coalition government, after winning 25 per cent of the national vote on an anti-EU, anti-immigration ticket. Backed by Deputy Prime Minister Nigel Farage, Cameron calls a referendum on UK membership of the EU. The country leaves the EU in 2017