One Man’s Opinion: Are Europe And Japan Likely To Give Better Returns In 2015?

The Federal Reserve didn’t drop the word “patient” from its latest forward guidance because it wanted to give itself the maximum flexibility, said David Joy, chief market strategist at Ameriprise Financial.

The Fed is likely to see three additional months of labor data and if the dollar strengthens amid slumping inflation and falling unemployment rate. They are likely to give themselves the flexibility to do what they think is right starting from June, he added.

Asked if the Fed should worry about the strong dollar which, in turn, could hit corporate profits and slowdown job gains, David answered in affirmative. While the data is going to tell the story, the Fed knows it’s getting close.

With 5.5 percent unemployment rate, wages are going to rise at some point in time soon. That doesn’t mean they would surely raise rates in June, but it remains a possibility. Dropping the “patient” word was a prudent move, and the Fed should now get into a “wait and watch” mode, he noted.

Asked if dropping the “patient” word means the US economy would see a rate rise in the next three-to-six months, David answered in affirmative. Fed deputy chief Stanley Fischer was right in telling the FOMC members that the central bank need not explain every single nuance about the forward guidance report – a little bit of mystery is not a bad thing because that keeps the market-participants on their toes. It’s okay to watch the data and talk about raising rates starting June, he observed.

The consumer discretionary sector is not looking good despite cheaper gas and stronger job gains. Asked to explain, David said there are essentially two forces at play now; one is the bad weather affecting the northern part of the country just as it did this time last year along with the port shut-down on the west coast.

But the economy is also witnessing more prudent and wiser consumers; they are not spending all of the increase in discretionary income that they are enjoying, the effects of which are profound. So there’s a little bit of spending, but there’s also an increase in savings rate. It’s difficult to say when consumer spending would rise, but better weather surely could spur higher spending. There’s no doubt consumers are in a much better shape, he argued.

Asked if consumption is likely to witness a strong rebound going forward, David said the consumer’s balance-sheet is in a great shape. The (consumer) debt-to-GDP and debt-to-networth ratios have come way down. Debt service costs have also come down, boosting consumer confidence. Purse strings are likely to loosen once the weather improves, but investors must be cautious, he noted.

Asked how investors should position themselves, David said for the domestic sector, consumer staples/discretionary and financials look attractive. Internationally, the eurozone is clearly witnessing a convergence of very positive influences. The higher stock prices are likely to continue on the back of a weakening euro. In the short-run, similar influences are happening in Japan and these two geographies are likely to produce better returns in the first of this year than the US, he contended.

European equities have already hit a seven-year high. Asked if there’s still room for gain in stocks, David said in addition to a weaker currency, the region is also witnessing a QE, lower energy prices and rising sentiment. There’s been a little bit of daylight for the region’s economy of late with lower unemployment and higher bank lending activity. The region seems poised to do pretty well, outperforming the US, he observed.

The broader European index has gained 15 percent since the start of the year. Asked if equities are fairly priced, David answered in negative. Stocks are still available at a discount compared to the US and now earnings expectations are being revised upward, more positive surprises relative to downward than there in the US. There’s still more room to run for Europe, he concluded.

You can watch the video here.