10 Big Economic Predictions for 2015: BofA Merrill Lynch

The global backdrop, meanwhile, is disinflationary. In 2015, BofA Merrill Lynch expects Japan to focus on ending deflation, while Europe must deal with a major threat of outright deflation, “which if it occurs, could trigger another debt crisis.”

5. Commodities

The outlook foresees downside risks to energy prices on the back of OPEC’s decision to allow the market to “stabilize itself.”  This could result not only in lower oil prices, but also in higher price volatility. BofA Merrill Lynch’s forecast for Brent crude oil and West Texas Intermediate is $77/bbl and $72/bbl, respectively.

The combination of a strong U.S. dollar, higher interest rates and relatively subdued growth should keep other commodity prices in check in 2015, according to the outlook. Still, base metals, particularly aluminum and zinc, should perform relatively well on falling inventories, though copper is less certain. Gold prices could fall to $1,100 per ounce.

6. Global Rates and Currencies

The greenback should remain strong in 2015 as the U.S. economy outperforms and the Fed moves to the exit, BofA Merrill Lynch said. The outlook expects rates outside the U.S. to remain low, or even decline, with the five-year German government bond yield potentially falling to zero and the euro/U.S. dollar and U.S. dollar/yen trades reaching 1.20 and 1.23, respectively, by the end of 2015. 

7. Credit Markets

BofA Merrill Lynch expects the five-year reach for yield trade to end next year as investment grade credit spreads widen to 140 basis points, with total returns close to zero. It says a “paradigm shift in U.S. high-yield outlook” should occur in 2015, with returns in the low single-digit range, as investors demand a higher premium for liquidity.

It expects defaults to rise moderately to about 2–2.5%. And investment grade and high-yield issuance should decline by 10–15% next year on less refinancing activity.

8. Global Fixed Income

Outflows for both retail and institutional investors in the U.S. and wider investment-grade spreads may be the story of 2015, according to the outlook. U.S. investment-grade bonds could see a total return of zero, it says.

At the same time, investment grade in emerging markets should return 2.4%; in Europe, 1.5–2%; and in Asia, 1.4%. Total returns for high yield could finish around 6% in Asia and the emerging markets, around 5% in Europe and 2–3% in the U.S.

9. U.S. Housing Market

BofA Merrill Lynch says new home sales are returning to more normal levels, and projects rises of 18% in 2015 and 13% in 2016 from extreme lows. It says existing home sales should increase by a more moderate 5% in 2015 and 3.2% in 2016, while home price appreciation continues to slow. 

10. Slowing U.S. Energy Boom

Substantial shale production continues to drive total U.S. energy production, but most shale oil projects generate little free cash flow, making output highly price sensitive, according to the outlook. The steep price drop will affect operations of small, levered shale producers, cutting U.S. shale oil output growth down to half of this year’s levels.

In 2015, BofA Merrill Lynch expects natural gas prices to average $3.90 per million British thermal units, driven by continued strong domestic production growth of 3.1 billion cubic feet per day and a drop in weather-sensitive demand. It further expects both the U.S. natural gas and thermal coal markets to remain weak throughout next year, with liquid natural gas possibly entering a bear market.

– Related on ThinkAdvisor:

• Gundlach Looks to ‘Giddily Despised’ Investments in 2014
• Bob Doll: 10 Economic Predictions for 2014
• Top 10 Affordable Housing Markets for Millennials
• 10 Best & Worst States for Retirement