More gloomy outlooks than this you don’t get! I really do understand managing client expectations, but London in January must have become far more bleak than I remember. Whilst everything Tom Elliot, International Investment Strategist at the Devere Group in the UK says is true, methinks this bear isn’t giving much credence to some of the positives hanging around. You decide. – CP
ALEC HOGG:  Welcome back to Power Lunch. Tom Elliot is the International Investment Strategist at the Devere Group and heâs warned, in a report put out today that investors need to reassess their risk appetite for 2015 because of volatility in the stock market. Tom is in our London studio of CNBC. Itâs good to have you with us, Tom. Just by way of an introduction here, Devere is a big operation â big money manager â 80,000 clients, $10bn that you manage on their behalf. I presume though, that like a Chief Executive of a listed company, you also have to manage expectations. Is this what youâre doing here?
TOM ELLIOT:  It is and I think 2015 will be the year in which wealth managers put a lot of effort into really just preserving wealth rather than promising clients that theyâll increase it. I think most people are starting this year with modest expectations of what stock markets and bond markets will be able to deliver this year.
ALEC HOGG: Why would that be? I ask this question because a halving in oil price is going to give a huge stimulant to many of the economies around the world, most of which are oil importers.
TOM ELLIOT: Yes, and South Africa will be one of the big beneficiaries of cheaper energy prices as a big nett importer â no doubt about that â as will much of the industrialised world. Against that concern, you have to weigh up the fact that one of the reasons why the oil price is falling is that demand is weaker than had been expected. The fall in the oil price reflects not only a supply issue as the Saudis carry on producing even as the U.S. comes up with all its shale oil but also; the demand hasnât grown as much as expected. This isnât just reflecting weaker than expected growth in China, but very weak growth in the Euro Zone as well and Japan hasnât been growing at quite the rate we had hoped after two years of abenomics. Itâs this weak growth in the stock market, at which investors are looking.
Theyâre saying âitâs all very well, being able to drive to work with cheaper gasoline in my fuel tank but if the reason for that is because itâs low demand globally for oil, what does that say about my other investments that will rely on demand to keep profits coming inâ. Itâs a mixed message and just to frighten the horses a little, when it comes to the high yield bond market, there are some people rather concerned that that part of the market has gone overboard generally, and that the trigger for a sell-off could be shale/fracking/energy companies in the U.S. Therefore, theyâve over-borrowed and canât repay their debt on current, low oil prices. Itâs a two-edged sword, this low oil price and itâs the negative side rather than the positive side that investors are focusing on.
It may turn out (this time, next year) that weâll say âhey, investors should have been focusing on the positive side’ as you did in your question but I guess, we just start the year with gloominess as the mode rather than optimism on this issue.
ALEC HOGG: It is that the gloomy view purveys if you consider that the GDP annualised growth rate in America in the third quarter, was five percent. Now, there you have your economic engine growing at five percent plus this morningâs news from China that itâs going to be investing $1trn to get its infrastructure program re-fired again. Those two engines: if they start kicking in and you add in a lower oil price on top of it, you could have something that maybe makes the gloomy Gusâs crawl back into their caves.
TOM ELLIOT: Youâre right. A word of warning on any government announcement on infrastructure projects. If itâs anything like U.K. government announcements, more than two-thirds will have been announced before and it will be over a very long time period, so theyâre big numbers but they donât really have an immediate impact. On the more general sense, I think thatâŠÂ You just point out the positives and the gloominess is being driven by such negatives that have been with us for some time. Thereâs concern over the interest rate rises weâre going to see from the U.S. and with that will probably come an even stronger Dollar. What about those countries, such as South Africa, that runs a large current account deficit and will need to be paying more expensive debt in order to roll over that deficit? Donât forget: the Dollar has to repay at higher interest rates, moving more expensive in Rand terms as the Dollar appreciates.
You also have all the politics going on outside of the oil issue â the Euro and the possibility of Greece leaving. You have U.K. elections. The U.K. seems to be on a self-destruct path with the Scots almost certainly coming back for another bite of the âIndependent Cherryâ in a few yearsâ time â possibly, the U.K. leaving the EU. You also have Putin driving a wounded bear who might lash out again this year at another country. As background to that, you also have more volatility in financial markets because investment banks arenât allowing as much capital as they used to make markets. Markets are more skittish than they used to be because there are fewer people in the game doing market making, providing that liquidity, and thatâs a direct response to increased regulation.
ALEC HOGG: Well, itâs one of those things that unfortunately, you take your pick. You put your money down and it takes your chances. Tom Elliot is managing expectations of his clients and Iâm sure, like a CEO who tells you to be cautious about the earnings improvement of his company if they overshoot the market, this rather moderate forecast for the year. Well, everybody will be delighted. Tom Elliot is International Investment Strategist at Devere Group. The other side of the coin, as I mentioned earlier, is that America is booming. China is ready to spend more on infrastructure and of course, the oil price, which is a huge stimulant for most countries around the world.
