Home' Trinidad and Tobago Guardian : January 8th 2015 Contents Happy New Year 2015!
Last year, 2014, was
quite an interesting year
and 2015 is already
poised to bring more
drama to the invest-
ment narrative. The
biggest surprise for
many would be the performance of fixed
income, specifically the long-dated US treasury
At the beginning of last year every invest-
ment adviser attached to a Wall Street firm
visiting our shores that I encountered---and
there were many---recommended getting out
of fixed income and going into stocks with
predictions that the 10-year US treasury bond
would be around 3.75 to 4.0 per cent at the
end of 2014.
They all got this call very wrong as the 10-
year bond ended the year at 2.18 per cent
down for the year. My advice for a 10-year
between 2 to 2.60 per cent has been well ven-
tilated during the course of last year. I wrote:
"Contrary to most expectations I do not
think this is the end of the road for bond
investors. I do not subscribe to buying and
holding long duration bonds but I think there
may be many trading opportunities during
the year as mixed data present both buying
and selling opportunities."
Long-dated US treasuries outperformed
stocks by some margin in 2014. The Vanguard
Extended Duration Treasury ETF returned
around 40 per cent in 2014 and it is clear that,
on a risk-adjusted basis, this was the best
performing asset class last year.
While it is rewarding to reflect on a good
market call, of more importance to you would
be what happens next.
I feel confident the US 10-year will remain
in the range that I first suggested back in June
2013. Short-term rates are likely to rise and
the US Federal Reserve have signaled an inten-
tion to move the repo rate most likely by June
of this year. However, money is flowing into
long-dated US bonds as easing programmes
in Europe and Japan have seen rates in these
In addition, heightened geopolitical risk and
emerging market volatility have also resulted
in the US continuing its role as the safe haven.
The overall effect is a flattening of the yield
Inflows into US treasuries and US assets,
in general, naturally lend to a strong US dollar.
At the time of writing, the US dollar index is
at an 11-year high. The benchmark DXY which
measures the US dollar against a basket of six
other major global currencies reflected the
best year for the US dollar since 2005 with
the index being up almost 14 per cent over
The strength of the US dollar also surprised
many forecasters and this is, in fact, linked to
the interest rate story.
At the beginning of last year I suggested
that, for 2014, investors should "appreciate
that growth that is below potential means that
there is a slack in the global economy. That
slack manifests itself in less wage pressures
in the emerging markets and the knock on
effect is lower prices. Factor in a general fall
in the price of commodities then add lower
marginal consumption levels in these emerging
markets and there are disinflationary pressures
While there was not an explicit prediction
of the rapid fall in energy prices, there certainly
was a view that the commodity space would
soften over 2014 and all of these factors dis-
cussed, to date, are, in fact, linked.
The oil and gas story is not just limited to
shale versus Saudi crude. Broader issues are
at play and investors should note, that over
the course of 2014 gold, silver (in part an
industrial metal), platinum and iron ore are
all down. Soft commodities such as sugar,
cotton and soyabean prices are also down.
The reality is that whether it is developed
or emerging markets there was, and remains,
slack in the level of economic output versus
potential. On a global scale this results in
downward pressures on prices. This means
that we are operating in a lower inflation envi-
ronment compared to the heady days of
In order to fight falling inflation (disinflation)
the central banks of Europe and Japan, in par-
ticular, are seeking to push interest rates as
low as they can. This is weakening their respec-
tive currencies and the money flow is going
into the US.
Stick to US stocks
Lower commodity prices---especially ener-
gy-related commodity prices---speak to lower
inflationary pressures in the US as well. Once
the US economy continues on its current trend,
it is likely to be the best performing developed
market economy in 2015. That would allow
the US Fed to keep to its promise to raise rates.
Given the stance of other major Central Banks,
it all portends to a lower for longer interest
rate environment but a strong US dollar into
On the side of the stock market, the view
at the start of last year was that on a risk
adjusted basis the US stock market was the
best place to be. That was certainly the case.
As measured by the S&P 500 index, US stocks
returned around 11 per cent and 13.5 per cent
if dividends were reinvested. That is not too
far off my call at the beginning of last year
which was for "high single digits" in US equi-
ties. 2015 is likely to bring a repeat of 2014.
Given the oil price dynamic it is no surprise
that the best performing stock in the S&P 500
for 2014 was Southwest Airlines up 126 percent
while the deepwater driller Transocean was
the worst performer down 60 per cent.
Last year marked the third consecutive year
that US stocks posted a return of 10 per cent
or more. There were 52 new highs in the market
last year as the indexes pushed higher and
The relentless upward movement for stocks
has seen the S&P 500 hit a 14-year high on
an inflation adjusted basis. This should once
again provide a wake-up call to local investors
who fear the stock market and, instead, seek
the safety of low-yielding fixed income prod-
ucts that actually produce negative returns
when matched against inflation.
Looking forward to 2015 I expect stocks to
continue to react positively to US GDP and
earnings growth. The current stock market
rally has lasted all of 70 months making it the
fourth longest market rally since World War
II. There is no doubt that the rally still has
legs but the reality is that nothing goes straight
up so expect some more volatility in 2015 on
the way to higher market returns.
As with any point in time there are risks
to consider. If there is contagion arising from
these risks, the base case scenario outlined
above would be altered.
The two biggest risks I see on the horizon
come from the high-yield bond market and
from the emerging markets.
Currently, there is a shake out in the riskier
(high-yield) energy sector bonds on account
of the falling oil prices. There are also issues
in Russia, Venezuela and Greece that can create
fault lines for holders of these bonds. Keep a
close eye on how any issues will impact the
global banking sector.
Strong economic growth can also cause its
own problems. If growth in the US really picks
up then one would expect the longer dated
bond yields to rise. While this is not my base
case scenario, such an event would precipitate
outflows from the emerging markets into the
more stable US market causing dislocations.
The bottom line is: as the US diverges from
the rest of the world in terms of stronger
growth prospects and the impact of lower oil
prices sets in globally, the velocity of capital
flows will increase. This will cause a fair
amount of volatility across markets.
The US markets, even though it may be the
best place to be on a risk adjusted basis, will
not be immune and given the multi-year rally
investors in the market will be open to profit
Such heightened levels of volatility should
actually be welcomed as they provide entry
points for investors many of whom have had
to watch from the sidelines as the markets
went straight up.
2015 brings with it many opportunities.
However the easy money in this rally has
already been made and investors need to be
a bit more savvy in the coming year in order
to enjoy what the markets have to offer.
Good luck and enjoy!
Ian Narine is a broker registered with
the SEC and can be contacted at
BUSINESS GUARDIAN www.guardian.co.tt JANUARY 2015 • WEEK TWO
The relentless upward movement for stocks has seen the S&P 500 hit a 14-year high on an inflation adjusted basis. This
should once again provide a wake-up call to local investors who fear the stock market and instead seek the safety of
low-yielding fixed income products that actually produce negative returns when matched against inflation.
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