The first quarter was generally lackluster for U.S. equity markets as measured by the major indexes. U.S. bonds and stocks returned little, as we watched the European Central Bank's quantitative easing (European-style) light up the returns there. Asian markets followed Europe with indexes rising nicely. These areas of the global economy have been suffering over the past couple of years. Europe has been battling the effects of a double-dip recession. Japan continues to battle deflation and negative dips in GDP growth. China has seen its GDP growth slow to around 7%, which is under their targeted trough of 7.5%.
What did the winning markets have in common? All of these economies were the subject of massive monetary easing. One thing the world has learned is that asset prices generally love quantitative easing. Europe and Japan both have engaged in massive asset purchases, while China has lowered interest rates and bank reserve requirements. All in all, the United States is one of the global economies looking to begin tightening monetary policy. We identified both Europe and Asia as markets that could win big in 2015 and we are now seeing the story unfold. Will Europe and Asia continue to be winning places to invest in 2015? We think so.
It is always a bit difficult to invest when the news is ugly. We all know Warren Buffett's sage advice that says to become greedy when others are scared and become scared when others are greedy. It is just tough to buy in a market when there is talk of a Greek default, deteriorating economic conditions and plummeting energy prices. We believe that a well-laid-out discipline of active asset allocation can help spot these “future” bright spots before they shine.
So, if Europe and Asia continue to perform as monetary stimulus works its magic, are there any other values that we believe deserve a look? The answer is yes. We see the signs of a bounce in Latin America, Australia and other materials-based economies. These markets are very inexpensive and we expect them to follow the recovery in Europe and Asia, as demand for commodities begins to recover. Commodities are cyclical and we think we are at an inflection point for the group, which we believe have the potential to be resolved to the upside this year. Our premise is based on the simple thesis that global central banks are fixated on spurring economic growth. Economic growth causes demand for people, energy and materials to rise. Increased demand in the face of decreasing supply should bring higher prices and profits to the manufacturers.
All in all, we find ourselves in a very unique spot. Global monetary policy is easier than it has ever been, with central banks worldwide fixated on fostering economic growth and price inflation. They are using tools such as QE (asset purchases) that prior to 2009 did not exist. The United States led the way as an early adopter of QE, which has been shown to support asset prices and economic growth. Now, other major economies are adopting similar programs. We have every reason to believe that a similar experience can happen to owners of assets there.
Finally, we would note that periods of economic stimulus, low interest rates and ample liquidity coupled with low inflation tend to be very good for equity prices. We never fight the Federal Reserve or any other central banks for that matter. We believe that U.S. asset markets will continue to prosper, but it is now time to look globally for better returns. Europe and Asia have started the year with solid performance. We think that the rest of the emerging markets will follow in stride.
Scott Colyer is chief executive of Advisors Asset Management