I am of the belief that the true investing new year (any year) begins after the Super Bowl which is……February. I liken January to the first half hour of trading in the market; lots of noise, conflicting opinions and scattered quick movements. This is followed by the “real market” where order flow can be recognized and rational decisions may be derived; February as it were. So here’s to a happy and profitable 2015.
That said, going forward what does 2015 hold for investors? There is nobody on the planet that can say with certainty how this year will play out but here are some “experienced thoughts” (meaning I am past thirty) that should have a high propensity of accuracy. First, after significant rare high returns in markets the last few years we can expect much more muted returns, or (gasp) even negative returns. The bull is now six years old, quantitative easing has ceased (for now), economic growth is strong (or looks like it) and the unwinding of low interest rates is being discussed by the Federal Reserve (at least in the U.S.). Geopolitical events coupled with social unrest and widening income gaps worldwide create both headwinds and opportunity.
This new year will be packed with uncertainty which will result in…..increased volatility. We saw glimmers of this increased volatility the last few months of 2014. Will interest rates rise with increased economic activity, or fall with economic slowdown and/or worldwide flight to quality? Will earnings come under pressure with currency fluctuations and slowdowns in emerging countries, or grow with increased economic activity? Will the new Fed Chair keep interest rates low with so much worldwide uncertainty, or actually begin to let rates rise? How will the dis-inflationary environment play out? Will China slow significantly, Europe pull out of its “funk”, oil recover or Russia default on loans to the West? Obviously no one knows, including myself (gasp,) so how should a portfolio be structured? Hedged, hedged and hedged.
I believe our current concentrated portfolio is structured, and balanced, to capture meaningful returns in 2015 all the while being fully hedged to mitigate any surprise market disruptions, corrections or significant declines. All of the stocks in the portfolio pay handsome dividends and, with a couple of new additions, have strong upside potential. With “risk off” stocks (telecoms, utilities), basic material and drug stocks and energy components the portfolio is slightly less defensive and slightly more aggressive moving forward. I like the energy transmission/transportation sector (beaten down with still growing worldwide energy needs), food production enhancement firms (growing worldwide population to feed), pharmaceutical research firms (disease prevention) and the telecoms/utilities (safe, growing dividend income).
So, summing up, 2015 will be uncertain leading to higher (and spikes in) volatility. Be hedged…..fully hedged and expect the “unexpected”. We are.
Here is to a safe and prosperous 2015!