As we move into the new year it is perhaps a chance to take a breath and reflect on where the world economy is and is going and where we should be looking to invest our savings.
The financial markets have been influenced heavily by the significant drop in oil prices over the last 6 months and will continue to be so well into 2015. This should be seen as a positive for many of the emerging countries in the world that consume large amounts of oil - lower oil prices should lead to better trade budgets and deficits, lower inflation and ultimately higher profits for companies. 2015 could be a good year for some emerging markets especially perhaps India, China and Indonesia.
However, the oil price collapse has also led to a large amount of short-term pain in many quarters. Of course energy companies have felt the fall-force on their profits, but also out right deflation has become a very real risk in some parts of the world. Negative figures are already being reported across Europe (for instance Belgium, Greece and Sweden) and even in the UK inflation stands at only 1%. Japan is back into negative growth and negative inflation. Deflation is a risk especially for highly indebted countries, which is perhaps most of the western world. However, central Governments and bankers are fully aware of the risk of deflation and should do all that is necessary to prevent it happening in 2015 and this should be therefore be good news for the financial markets. The Bank of Japan, China and even the European Central Bank are all saying the right things in terms of doing all that is necessary to raise inflation. Expect continued liquidity and super low interest rates to continue meaning long-term winners are likely to be global equities and commercial property. If the ECB is as good as its words to do 'all that is necessary' 2015 could be the year that European growth finally gathers momentum which would be a positive for European equity markets.
What of the UK? UK equities still look moderately attractively priced as an asset class. Given moderate growth, low interest rates and low inflation, 2015 should see some upward momentum. However the UK will still have to struggle against some patchy economic performance in some parts of the world and growing debts. Economic growth should be supported by lower oil prices, capital investment and some takeover activity. Regardless of capital valuations, UK equity investors should still benefit from dividends of 3.8% and dividend growth of between 6 and 8% per year.
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