Stock markets worldwide will rise next year as the U.S. economy expands while Japan and Europe try to spur growth with monetary stimulus, according to analysts at Barclays Capital.
“We forecast global equities to generate a total return of 9 percent in 2015,” the investment bank said in a report
on Thursday. “We think earnings growth will be strongest in Japan and Continental Europe, as both regions benefit from currency weakness.”
The yen and euro are expected to fall in value versus the U.S. dollar as central banks in those regions pump more money into the financial system. The Bank of Japan on Wednesday voted to continue growing its monetary base by $683 billion a year as the country seeks to bounce back from its fourth recession in six years.
Barclays expects the European Central Bank to begin buying the debt of European countries next year in a stimulus measure known as quantitative easing. The U.S. Federal Reserve last month ended its third round of bond-buying after increasing its asset holdings to $4.5 trillion from about $1 trillion in 2008.
“The U.S. will lead the way next year,” Ajay Rajadhyaska, co-head of fixed income, currencies and commodities at Barclays, said to reporters in New York on Thursday. “The U.S. economy will be resilient with 2.5 percent to 3 percent growth.”
He said the unexpected drop in oil prices this year and subsequent decline in inflation expectations have contributed to the positive outlook. Crude plunged as much as 32 percent since June as global supplies expanded.
While Barclays forecasts economic expansion for the U.S. next year, it favors Japanese and European stocks because they are less expensive than U.S. stocks, according to several metrics the bank analyzes.
“Japanese equities look cheap,” said Jonathan Glionna, head of U.S. strategy at Barclays, citing their average forward price-to-earnings ratio of less than 14 times, compared with about 17 times for the S&P 500. He said Japanese companies also have room to increase their stock buybacks and pay higher dividends, which would support their share prices.
Meanwhile, Bob Doll, chief equity strategist at Nuveen Asset Management, remains bullish on stocks, but he expects increased volatility, as seen in the market's turmoil in September and October.
"I think the trend is up, but it's going to be a bumpier ride than the last several years, where with 20/20 hindsight it was pretty easy," he told CNBC
The CBOE Volatility Index, which measures expected volatility for the S&P 500 index, hit a seven-year low in June. It soared 170 percent from Sept. 19, when the S&P 500 hit a record high, to Oct. 15, when the S&P 500 reached its low. Since then, the volatility index has fallen back 47 percent.
Volatility should increase as the Federal Reserve withdraws its stimulus, Doll said. "I think the Fed had a lot to do with the volatility. When there's ample and excess liquidity, it does dampen volatility, and obviously the path of least resistance was to the upside."
Economists expect the Fed to begin raising interest rates around mid-2015.
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