Speaking in London this morning, Lewis talked through the firm’s six key investment themes for 2015.
The first of these was Lewis’ view that despite many column inches to the contrary and the successful conclusion of Europe’s asset quality review, the world remains in the throes of a banking crisis. And, as a result of this, it is important to follow what the banks do, rather than what they say.
“With the exception of the US, banks haven’t yet gone through the full loan-loss recognition process, “ Lewis explains. Within the eurozone, provisioning for losses on their respective loan books remains inadequate and capital is scarce, he added.
According to Lewis the AQR was a missed opportunity and, as a result, the weak capital position in which the banking sector still finds itself, "will condemn the eurozone to deteriorating money supply as it continues to rebuild balance sheets through retained earnings."
And, he added: “The fragility of the banking sector isn’t just confined to the struggling economies of the eurozone. There are growing concerns that much of the capital allocated to the China growth story has been misallocated and that could spur a wave of loan losses, that will see the epicentre of the crisis move from west to the east,” he said.
Lewis expects to see full eurozone quantitative easing during the course of the year because of this continued undercapitalisation of the banking sector, which he says, could be positive for equities, but might also see borrowing rates increase as a result.
One of the other major themes expeted in 2015, according to Lewis is the continued divergence of macroeconomic policy on the part of the world’s central banks and, as has already been the case in the US, monetary stimulus will continue to be the major driver of asset returns.
The end of QE in the US will likely prove challenging to US equity prices, he said, while the continuation of loose monetary policy in Japan should boost equities there, as will the start of QE in Europe, should it happen.
But, Lewis adds, because QE in Europe has already been widely discounted the immediate impact on asset prices might be reduced, but if it is linked with looser German fiscal policy, it could drive European equities sharply higher.
“In many respects, the world is entering a period of rotational stagnation, whereas growth slows in one region, so the baton is picked up by the next one. Currently, growth in China is slowing and the major question now, is whether or not the US will be given enough time to get growth to a sustainable enough level before it has to pick up the baton,” he said.
The other themes picked out were: the unintended consequences of QE3, which Lewis believes has significantly damaged the recovery in the US and the expected devaluation of the Yuan, which will be the result of the Asian giant's economic slowdown.
As a result, heading into 2015, the group is positive on European and Japanese equities and neutral on the UK. It is negative on the outlook for both the US and EM equities. It is positive on high yield bonds, and remains long the dollar compared to other currencies. And, is strongly negative on the outlook for commodities.
