Forecasters have made a number of predictions when looking at the 2015 financial landscape — things like slower growth for China, an interest rate hike by the Federal Reserve, a rising dollar and continued low volatility. But what if they’re wrong?
“There is a high degree of confidence among market participants — ourselves included — in several outcomes for 2015,” writes Jeffrey Kleintop, senior vice president and chief global investment strategist at Charles Schwab. “That could lead some investors to take it for granted that they are sure to happen.”
So, what if these assured outcomes don’t happen? What if the unexpected happens? Kleintop examines what could be five possible surprises of the financial landscape in 2015 in a commentary released last week.
“These are not necessarily surprises we expect to happen in 2015, but ones we want to be mindful of given that market participants in general seem unprepared for them and that such situations could prompt a dramatic reaction if they occur,” Kleintop stresses.
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Kleintop’s simplest suggestion is to be prepared.
“Whether or not these particular surprises come to pass, a new year almost always brings surprises of one form or another,” he writes. “Having a well-balanced, diversified portfolio and being prepared with a plan in the event of an unexpected outcome are key aspects of successful investing.”
Here are the five surprises he urges investors to be ready for:
1. China’s growth accelerates
Roughly 95% of economists expect slower growth for China in 2015 than in 2014, Kleintop says. He points to figures from Bloomberg LP that show economists have been revising down their growth outlook for China. Right now, the consensus is for 7% growth of China’s gross domestic product in 2015, which is down from a projected 7.2% four months ago and 7.4% for 2014.
So, Kleintop asks, what could cause this outlook to be wrong?
“For one thing,” he says, “Chinese new business startups are soaring thanks to reduced red tape, even amid slower growth for state-owned enterprises.”
Revisions to China’s GDP in December showed a changing composition of GDP growth from export-oriented manufacturing toward the service sector, which has benefited from rapid startup growth.
Kleintop’s surprise outcome: “Better growth could drive better performance for China’s stock market.”
2. The Fed doesn’t raise interest rates
Another thing economists are fairly certain of is the Fed raising interest rates in 2015, at least according to 95% of economists tracked by Bloomberg.
“But it could be a closer call than this high percentage indicates, given the changing membership of the Federal Open Market Committee and the state of the economy,” says Kleintop.
Kleintop breaks down the vote on the Fed’s action in December that was approved 7-3.
“The three dissents from the majority view reflect rising discord inside the Fed over the best course of action,” he says.
Of the FOMC’s members that favor rate hikes, Kleintop points out that two (Philadelphia Fed’s Charles Plosser and Dallas’ Richard Fisher) are retiring and another (Cleveland Fed’s Loretta Mester) will not be a voting member in 2015.
And while the most vocal proponent to keeping rates low (Minneapolis Fed’s Narayana Kocherlakota) will also not vote next year, Kleintop says he will most likely be replaced by a “similarly minded” Charles Evans from the Chicago Fed.
“These changes could affect the timing of interest rate hikes — especially if the U.S. economy experiences a soft spot in the first half of the year, which has become a common occurrence in recent years,” Kleintop says.