LAST WEEK I took a look back at 2014 so this week, in my last column of the year, I shall take a stab at looking forward into 2015.
We came into 2014 in the firm belief that the central banks would begin to tighten – if not physically, then at least verbally. I think it’s fair to say that we will be going into 2015 in very much the opposite mood where no tightening can be expected other than, and this is now looking less and less likely, by the Federal Reserve.
There is no doubt that more seasoned beasts, such as myself, are waiting for the world to return to normality, but only in the aftermath of another cataclysmic correction of asset prices. Most of us old dogs agreed that such a correction would eventually happen but that 2014 was not going to be the year. 2015, we were convinced, was the year when the balloon would go up. I am no longer so certain.
The disinflationary effect of the plunging oil price which has, let’s be honest, taken all of us by surprise, will surely persist in one form or the other well into the year – and that means that the prospective Fed tightening could well find itself on ice through all of 2015. Fed speakers have been mild of late and the verbal warfare which existed in early to mid-2014 has gone eerily quiet.
I have asked a few senior folks on the buyside whether they are positioning for anything special. The consensus seems to be that the relative boredom of 2014 will carry on. (Don’t get me wrong: if you were long Russian equities, unhedged, and find yourself down by 50% in dollar terms, it hasn’t been a quiet and boring year at all. Mind you, if you were long Russian equities, unhedged, you’ve probably already been fired for abject stupidity.)
The disinflationary effect of the plunging oil price which has, let’s be honest, taken all of us by surprise
LOOKING AHEAD AND from very much a European perspective, the looming danger is surely Greece with its seemingly predictable election – although it’s not over until the last vote is cast and counted – and the possibility of another rattling of the single currency cage. I do, however, find it hard to believe that the currency partners will not once again bend over backwards in order to keep this little olive farm in the union and to keep the myth of one large, happy family alive.
Thus, I am happy to declare that there will be no “Grexit”, whether by dint of some aggressive ECB buying programme or other means. The fact is that credit considerations clearly preclude the ECB from buying Greek government bonds but as we have learnt again and again where there is a will there is a way. The eurozone has not spent €280bn to watch Greece go under.
Should Greece go horribly wrong, and there is no saying that it won’t, then the CoCo market might find itself looking very sick indeed. If banks were to suffer the double-whammy of a high-yield bond and leveraged loan market hit by defaults resulting from low oil prices at the same time as a sovereign hokey-cokey in the eurozone’s Mediterranean fringe, then things could suddenly turn quite ugly for hybrid bank paper such as AT1s. Please note the “if”, for I can’t really see it happening. As noted above, too much taxpayers’ money has been invested in keeping the ship afloat for the authorities to suddenly walk away.
On the basis that rates are going nowhere and that therefore equities, irrespective of how expensive they might look on historical valuations, are still competitively priced versus rate-based investments, it might be fair to assume that 2015 isn’t going bring on the “big one”.
I KEEP GETTING asked what my view on China is, but I repeat that I find it hard to believe anything they tell us, be it good or bad, and therefore I have nothing meaningful to say on the subject. China will be whatever the Beijing government wants it to be and let’s leave it at that.
Real China hands tell me things were never as good as they were once made out to be and that they might currently be much worse than reflected in the releases, but with a country as large and as heterogeneous as China, the government can’t afford bad news, true or otherwise. As one smart young chap recently said to me, if things were as clever as they tell us, the rich Chinese wouldn’t be pouring money into London and New York in the way they are and wouldn’t be busily trying to acquire the respective citizenships.
So there we are: as boring and uninspiring as it might seem, I’d suggest 2015 to be “steady as she goes”. That is not what the dealing community wants to hear and on the back of a very pedestrian 2014 it could do with a strong trading year but I cannot see that coming. What effect that might have on staffing levels in banks? Well, I’ll let you work that one out for yourselves.
