“Past events will always look less random than they were” Nassim Taleb
Another year behind us and for the most part investors have enjoyed stellar returns, as the influence of the world’s major central banks outweighed the lower than expected global GDP growth, geopolitical tensions and the deflation risk in Europe. There have been a few bumps along the way and not all equity markets performed well in 2014 but investors have been well served by holding globally diversified investments.
Overall though, as I reflect briefly on 2014, what really stands out is the decline in government bond yields across the globe and the collapse in oil prices that took hold in the second half of the year. In Europe, falling inflation, a more subdued outlook for economic growth and more aggressive monetary policy from the European Central Bank (ECB) all served to push the German 10-year yield to a record low of 0.54%, down from 1.94%.
Global Economy yet to turn the corner….
2014 began with a renewed optimism among the consensus that the global economy had reached a turning point; the World Bank forecasted global GDP growth of 3.2%, above the 2.5% recorded in 2013. However, the global recovery was more muted than expected with growth of 2.6% and increased divergence among the world’s major economies. Economic momentum picked up in the US and the UK, while the Eurozone economy continued to languish and Japan was unable to shrug off the consumption tax increase in April. Meanwhile, the slowdown in China gathered pace and growth disappointed in many of the emerging market economies where we have seen domestic policy tightening.
Monetary Policy Divergence….
The theme of monetary policy divergence across the world’s central banks began to gradually take shape in 2014. The US Federal Reserve (Fed) ended their QE3 monthly bond purchases while both they and the Bank of England (BOE) began to take questions on the possible timing of rate hikes as economic activity picked up. Meanwhile, the ECB and the Bank of Japan (BOJ) were forced to loosen monetary policy further. This perceived divergence played out most in the currency markets as both the Euro and the Yen weakened considerably against the US dollar.
Pavlovian response to Monetary Policy is alive and well….
Still, every time we saw a correction in equity markets the world’s major central banks came to the rescue; the Fed and the BOE continued to play the “lower for longer” tune, reassuring investors that they won’t have to go cold turkey if the withdrawal symptoms from easy money prove too much. Even China’s central bank got in on the act, cutting interest rates on November 21st for the first time in two years as the economic outlook deteriorated. Since then China’s Shanghai Composite Index rallied 27%, bringing the annual gain to nearly 50%, the best performing major equity index over the year. This was followed by Indian equities which ended the year up 40%.