Forecasters see U.S. leading the growth in 2015

The U.S. will lead the way to an uptick in global market growth in 2015, with different markets picking up steam at different paces, said market forecasters.

In addition to being the year in which the Federal Reserve is expected to finally raise interest rates, forecasters predict 2015 will also be a year in which global equities will outperform global bonds.

“We see a global growth pickup in 2015 that includes emerging markets and developed countries,” said Richard Lacaille, London-based executive vice president and global chief investment officer at State Street Global Advisors.

Mr. Lacaille added, however, that “growth is unevenly distributed.”

Russ Koesterich, managing director and chief investment strategist for BlackRock Inc. in New York, agreed there will be uneven growth. “The key trend next year is we're going to have a market and global economy defined by divergence,” he said. “It's going to be an environment in which different regions and different asset classes are going to perform very differently.”

The ranges of top strategists' forecasts for 2015 were: a total return of the S&P 500 from 5% to 12%, the 10-year Treasury yield at year-end 2015 ranging from 1% to 3.5%; a real U.S. gross domestic product from 2% to 3.8%; and a CPI from flat to 2.6%.

“We got an earlier start on monetary policy,” explained Robert Doll, Princeton, N.J.-based senior portfolio manager and chief equity strategist at Nuveen Asset Management, about the U.S. economy. “Fewer fiscal headwinds going forward will lead to a pickup in corporate spending.”

Timothy Hopper, a managing director and chief economist at TIAA-CREF, New York, said the U.S. will continue to be a market that will see strong demand from both domestic and international investors in 2015, although he noted that he expects to see “more volatility in financial markets here in the U.S.”

“Businesses are starting to spend money and invest back in their businesses. They've been cutting back for the past six years. This means hiring and investing on the factory floor,” Mr. Hopper added. “We think this trend is going to accelerate.”

Unemployment in the U.S. is stabilizing. Sources that Pensions & Investments spoke with said they believed the unemployment rate, currently at 5.8%, would be somewhere between 5.2% and 6% a year from now.

This, Mr. Hopper said, could lead to more wages being paid, a strengthening of the wage rate and an increase in consumer spending. He noted, however, that he thinks “we'll begin to see during the end of next year.”

But not everyone is as optimistic about the U.S.

Eric Lascelles, chief economist with RBC Global Asset Management Inc. in Toronto, said that although the “U.S. is still an attractive place” to invest, it “still may not generate top returns.” He believes “Europe has potential for more return than the U.S.,” explaining “the challenge there is there's more risk and uncertainty centered on that prediction. We think valuations are dirt cheap and recession fears are overblown.”

“The action is abroad. The U.S. economy is moseying along at 2% real GDP growth,” said A. Gary Shilling, president of A. Gary Shilling & Co., Springfield, N.J. “The optimists are assuming there's going to be a big breakout, thinking the private sector is going to take off, but I think that's yet to be demonstrated.”

Some industry experts are turning their attention toward Europe for 2015.

Andrew Pease, global head of investment strategy of Russell Investments, London, said during Russell's Strategists 2015 Global Outlook call on Dec. 10 that he's been “seeing a rebound happening around European corporate (earnings).”

Although Mr. Lacaille said SSgA has been seeing “somewhat meager growth” in Europe, he pointed out that some countries, such as Italy, Germany and France, have the potential to improve their economies by following through with economic reforms.

“Politics and policies are becoming more important factors,” Mr. Lacaille added.

Market forecasters also are expecting Japan's economy to stabilize in the upcoming year.

Erik Knutzen, multiasset CIO at Neuberger Berman Group LLC at the New York-based firm's outlook event on Dec. 10, said that “Japan is stabilizing (and) on the cusp of higher growth.”

“Valuation-wise, Japan's had a big jump up,” added Mr. Pease. “With the policy intentions coming through and with profitability going up with Japan's corporate (earnings), though we'd rank Europe above Japan (as a top destination for investors), Japan certainly has a lot going for it.”

The recent plunge in oil prices also will play a big role in how markets fare in 2015. With sources forecasting West Texas intermediate crude oil prices winding up anywhere between $50 and $80 a barrel a year from now, many countries are becoming seriously concerned about deflation. The WTI Crude Oil Spot Price is at $55.96 a barrel, down from $97.48 one year ago.

“The Saudis are playing a game of chicken with weaker OPEC (Organization of the Petroleum Exporting Countries) countries and U.S. frackers,” said Mr. Shilling. “They're saying: "We can take prices lower than you can,' which could cause some severe financial problems with the world.”

“This is one of those cases where oil and politics go together,” said Donald G.M. Coxe, chairman of Coxe Advisors LLC, Chicago. “The Saudis and Emirates refuse to cut production of oil because they're trying to punish their enemies in the Middle East.”

Mr. Coxe added that although the results of this move could be painful in capital markets, “it creates far more winners than losers.”

The biggest of these winners, he said, would be the largest importers of oil, namely China, India and Japan.

2015 might also be the year in which the slowdown of market returns among emerging markets are expected to get positive, although not all emerging markets are created equal.

“Select emerging markets appear to be attractive,” said Mr. Knutzen. “Emerging market debt is another area that we find relatively attractive.” Yet, he noted, there's “still concern over geopolitical risk that could contribute to increased global volatility.”

“It's worth watching emerging markets equities closely. Emerging markets stock valuations are quite attractive. There are some good opportunities there,” said Mr. Lascelles.

Mr. Lascelles said he believes “countries like Mexico, India and Indonesia perhaps may improve.”

Those interviewed agree that 2015 is the year in which the Fed will raise rates, they also agree it will be yet another year in which stocks outperform bonds, albeit modestly.

“The bull market in bonds is once and forever over,” said Mr. Lascelles. “We see gains (in stocks), but not the walloping gains of 2013.”

“We think equities will outperform bonds,” said Mr. Koesterich. “There are still opportunities in high-yield fixed income, but you've got to be careful about those segments of the market tied to energy.”

“We believe interest rates are going to rise, which will put a headwind (on fixed income) where there wasn't before,” said Mr. Doll.

“With equities, we need to be prepared for that first batch of volatility as rates rise, but we need to think what the economic conditions will emerge,” said Lacaille. “It could lead to inflation, employment growth (and even) economic growth. It could be beneficial for company earnings and for the economy.”

“Most of the things people are concerned about are currency wars, outbreak of geopolitical violence,” said Edward Keon, managing director and portfolio manager at Quantitative Management Associates, Newark, N.J. “But I'm an optimist at heart; I think we'll continue to muddle along and the markets and economy will continue to do pretty well.”

Mr. Doll asked about the year ahead, said: “Do we stop talking about deflation a year from now? That's still one of the threats emanating from Europe. Wouldn't it be nice if that word left our vocabularies?” n