Europe’s companies are not investing—or at least not enough in the eyes of the ECB. Its president, Mario Draghi, recently called on Europe’s governments to counteract this, either through structural reforms in the weaker states or government investment programs in the stronger ones. Draghi’s request was not surprising. The flagging appetite for investment on both sides of the Atlantic has been noticeable for a long time now. Furthermore, it is not being stimulated by record profit margins (see the United States). S&P* calculates that only 42% of the cash flow of U.S. companies is flowing into capital expenditures in the current recovery, compared with 48% in the previous boom and more than 50% before the turn of the millennium. Taken together with the muted demand for credit, this could also be an expression of skepticism about the current recovery. In light of the meager growth rates in Europe, a U.S. recovery not benefiting all parts of the society and stagnating inflation around the globe, this is understandable.
It is just as understandable as Draghi’s desire to pass on the responsibility for economic stimulus to political leaders. After all, the central banks will have to continue to dictate the pace in 2015, too. However, there will likely be different dynamics because of the diverging domestic growth rates. Whereas Europe and Japan will be flooded with liquidity as a result of low interest rates and securities purchases, in the United States and in Great Britain the reins will likely be tightened in the coming year. When exactly the Fed and the Bank of England will initiate an interest-rate turnaround is less important in this respect. More important is that the upwards path of the interest rate cycle is not too steep.
This would support our theory of the turtle cycle, which we will see in 2015 as well – a flatter and slower, but longer-lasting recovery. For this reason, we are also looking less apprehensively at the possible economic disappointments on our path to recovery. Nevertheless, this turtle cycle will also ensure that the yields expected across all asset classes in 2015 stay generally in the single digits as volatility increases. We see a range of opportunities, for example in high-dividend stocks and selected emerging-market hard-currency bonds, active portfolio management will be required in the coming year to best exploit such opportunities and avoid risks.