The start of 2015 presents an opportunity for investors to review where they are positioned across the asset classes.
Peter Harrison, head of investment at Schroders, says: “There has been a bull market in complacency and volatility has been very low as the world became very comfortable. Yet, in the past few weeks, we’ve seen the third largest move in the oil price since 1900 and with the Swiss franc we saw the largest one-day move in a major currency pair ever.
“Tensions in the world are very real and it seems inevitable that this year volatility will be higher than it has been in the recent past. That’s a good thing – we need to get risk back into markets.”
Mr Harrison adds: “We are seeing more growth everywhere; the oil price fall is a huge stimulus that has changed a lot of things and made Europe considerably more attractive relative to other asset classes. There are still signs of value in equity markets.”
Justin Onuekwusi, multi-asset fund manager at Legal & General, agrees that the oil price has created an environment that favours European equities.
He explains: “If you look around the world and at the markets we can invest in – European equities, UK equities and US equities – it’s clear that Europe should be a beneficiary of falling oil prices over the US and the UK.
“European equities tend to have less energy exposure than both US and UK equities.”
Mr Onuekwusi adds that a weaker euro on the back of the European Central Bank’s planned quantitative easing programme will be a boost to European equities, particularly as the region is a big exporter.
In fixed income, John Ventre, head of multi-manager at Old Mutual Global Investors, voices his concerns about government bonds.
“Government bonds at these levels are, we think, a very dangerous asset. At the same time, they are really the only way to hedge a portfolio against deflation risk, so it is still appropriate to hold some government bond duration but you want to be holding as little as you can get away with in terms of risk management,” he advises.
Mr Ventre sees opportunities for both fixed income and equities in emerging markets, observing that the region has become cheap, making it an “attractive entry point” into the asset class.
But he is cautious on the outlook for US equities, remarking that it is the asset to avoid even though the fundamentals are good.
He explains: “They are the most expensive of the major equity regions so you’re paying a pretty high price for what could well be pretty sluggish earnings growth this year, if not indeed negative because of the dollar effect.”
Ellie Duncan is deputy features editor at Investment Adviser
