How did our forecasts for 2014 do?

Index 2014 (Market Close 19 Dec 14) 2014 forecast (from 9 Dec 13) Dec 19 (variance from 2014 forecast)
UK 100 6,545.3 7,000 – 454.7     (-6.5%)
UK 250 15,888.9 16,000 – 111.1     (-0.7%)
FRA 40 4,250.8 4,700 – 449.2     (-9.6%)
GER 30 9794.3 9,500 + 294.3    (+3.1%)
US 30 17804.8 17,500 +304.8      (+ 1.7%)
NI 255 17,621 17,500 + 121     (+0.7%)

I was more positive on 2014 than it turned out, so guilty of being a bit too optimistic, but was very close on the Dow Jones. I still see value in UK stocks as measured both by multiple and price to cash flow so please see my 2015 predictions below. These are more measured than for 2014.

The recent volatility represents some investor wariness over geopolitical issues and extreme movements in commodity prices. Both factors impact the UK 100’s high weighting in mining (7.7%) and petroleum (14.1%). Relative to the Dow Jones, the UK 100 has lagged a bit, and has yet to exceed its Millennium Eve highs of 6930.

Geopolitical events dominated in 2014

2014 saw a number of major issues emerge that impacted investor sentiment:

i) A game of brinkmanship has emerged centred around Russian support for the Ukrainian separatist movement in Donetsk. Despite significant sanctions related pressures on the Russian economy, there is no sign yet of a policy change. The Rouble movement from RUB35/ US Dollar before the MH17 tragedy to over RUB70 speaks volumes about the lack of confidence in the Kremlin’s economic management and it risks an inflationary surge in 2015. The Bank of Russia’s reserves ($416bn) have depleted by about one fifth over 2014 due to efforts to smooth the decline.


ii) After over four decades of price targets and production quotas, the OPEC leadership made a historic decision on October 27th to let the oil market find equilibrium i.e. the point where supply = demand and there is no unsold inventory. Lower oil prices will eventually choke off expensive supply in theory. However excess supply caused by US shale oil, higher output from Libya and Iraq (the Kurds can now export 550k bbls per day) could mean oil supply exceeds demand.


iii) The UK is more politically complex place ahead of May’s General Election. Despite the lost Independence vote, the SNP will make inroads into Labour’s vote in Scotland with UKIP gaining at the expense of the Conservatives in the North/ Midlands.


What about 2015?

In terms of economic / political developments my key predictions are:-

i) China – GDP growth over 2015 to slow to 6.25% from 7.2% ie a “soft landing”

ii) Iron Ore – to decline to around $60/ MT from $70/ MT

iii) Rally in West Texas Instrument (WTI) crude oil prices to $60/bbl to $70/bbl

iv) UK GDP growth to moderate to 2.5% in 2015

v) UK Base rates to end 2015 at 0.75%

vi) GBP/USD1.65 ; GBP/ EUR 1.25

vii) UK General Election – another Conservative/ Liberal coalition emerges, the Tories obtain a very small majority but decide a Coalition will give the government a working majority.

viii) US Federal Reserve alters the Fed funds rate in Q3 with a modest tweak to 0.25%.

ix) Stagnant/ lower UK property prices with price declines of c.5% in the UK and between 5%-10% in London

x) 3% GDP contraction in Russian GDP



i) Oil service companies – the hardest hit sector should recover as oil major capex budgets clarify over 2015. I think the oil services sector has oversold but clarity on budgets will only arrive mid-2015.

ii) Lower oil price – beneficiaries typically in the leisure / transport sector will benefit from cheaper crude oil as hedges expire.

iii) China – Chinese equities, whilst broadly positive I recommend taking a diversified approach via China focused investment trusts.

iv) Banks should benefit from the rate cycle turn (higher interest spreads) when it occurs in the second half of 2014.

v) House builders – a calming down in £1m+ bracket (due to stamp duty changes) is likely to impact higher end suppliers.



Where do I see global equities in 2015?

Index 2015forecast Comment
UK 100   6,750 Negative effect pre-election but a jump post. P/E 14.5x ok
UK 250 16,000 Little progress 17.7x P/E a bit rich – a 4% gain expected
FRA 40   4,500 Lower EUR a positive, reform agenda underway finally
GER 30   9,500 Flat year for DAX due to Russia/ BRIC contagion
DJI 17,000 Higher Fed funds/ higher USD / weaker global market/ lower oil earnings will impact US equity market
NI 255 18,000 Japan Prime Minister Shinzo Abe reforms to start/ low Yen will help exporters


Investors need to remember that “equities climb a wall of worry” – there has been decent GDP acceleration in both the UK and USA in 2014 and a lax monetary environment remains in place, and is likely to only be tinkered with in 2015. I am keen on a “buy the dips” approach for UK equities particularly since bond yields (10 Year gilt 1.83%) and cash deposit rates are offering almost negligible returns.

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