How to reallocate your portfolio for 2015

We surveyed the pros for their best portfolio boosters for the new year. Their picks? The U.S., Japan and (gulp) energy

 
Illustration of man balancing two piles of paper

(Illustration by Serge Bloch)

As 2014’s volatility spills into the new year, the normally mundane task of reallocating one’s savings has become a fraught exercise. With different sectors, asset classes and even currencies heading in widely divergent directions, your portfolio might well need tweaking again come spring.

Certainly, there are no obvious winners in the months ahead. American stocks look pricey, for all their good prospects. It’s hard to get excited about Europe while the continent grapples with deflation. And fixed income seems almost fated to lose once the Federal Reserve begins raising interest rates.

Know this: By the time December rolls around, it’ll be clear where you should have shifted your pile. And it likely won’t be where the herd expects. “If you look at what happened [in 2014], the 10-year treasury opened up at just over 3%, and where we finished the year was at 2.2%. Last year at this time, most people were forecasting that it was going from 3% to 3.75% or 4%, and it went in the exact opposite direction,” says Heidi Richardson, a San Francisco-based global strategist with investment giant BlackRock. “If you were short long bonds, you lost a lot of money. It was actually a very good asset class.”

With that in mind, we asked some savvy portfolio managers and investment strategists for their best ideas for growing your nest egg—and keeping it from cracking—in 2015.

U.S. Equities

Quality counts in volatile times and, geographically speaking, that equates to the United States. Lower oil prices should put more money in the pockets of consumers already emerging from years of self-imposed austerity, says Richardson. “It’s definitely not a cheap marketplace,” she cautions. But she still thinks “old money tech”—like Microsoft (Nasdaq: MSFT) and Apple (Nasdaq: AAPL)—“that historically have been able to weather any rise in interest rates will be direct beneficiaries of this capital expenditure spending cycle that we anticipate as we move into 2015 and 2016.”

Michael Greenberg, a portfolio manager at Franklin Templeton Solutions in Toronto, agrees U.S. stocks have a sunny outlook over the long term, meaning seven years or more. “We think there’s some good earnings growth potential from these companies, because they do have, and they will have, a pretty good advantage, having access to cheap energy [and] cheap labour, and we’re seeing manufacturing come back to the U.S.”

Japan

The deflation that hit the European Union in December is nothing new to Japan, and there’s renewed negative sentiment surrounding the country, but Greenberg takes a contrarian stance. “We have a Japanese central bank that is being quite aggressive,” he says. “The largest pension plan in the world is Japanese, and they’re increasing their allocations to equities, and that’s going to represent quite a large amount of money going into the markets. So we think there’s good support for the market in 2015.”

Richardson is likewise bullish on Japan, but as a value play. “It’s the cheapest market out there,” she says. “If we look at the price-to-book basis, it’s less than half of the U.S. marketplace.”

Energy

Where oil prices go next is anybody’s guess, but while they fall, Jerry Koonar of Leith Wheeler Investment Counsel in Calgary is seeing stock valuations become more and more attractive. “It allows us to maybe uncover some opportunities in the names that we were following that we may not have owned previously,” the portfolio manager says.

Greenberg sees energy as a potential second-half story for 2015, after a new floor is established. “As the year progresses, we think at some point the supply reaction to low oil prices will start to happen,” he says. “You’re starting to see rig counts go down in the U.S.; you’re seeing capital expenditure budgets slashed in the oilsands and the shale oil fields in the U.S. So at some point, as that supply comes off, that supply-demand balance becomes a little bit more natural.”

Emerging Markets

Investors have soured on emerging markets in recent years, as growth has failed to meet projections, but Richardson foresees a turning point. “I think you’re going to start seeing people say, ‘Wow, these valuations are really, really attractive, and over the next five to 10 years, I’m going to be happy that I have exposure there,’” she says. Richardson finds emerging Asia the most attractive, especially China. “China gets a bad rap. It’s got all this stuff in the news, with ghost cities and real estate markets crashing, but when we think about it, if the U.S. economy is forecast to grow somewhere between 2.75% and 3% for 2015, and China is growing at 6.5% or 7%, we’re still looking at essentially twice the U.S. [growth rate] on a much bigger base than 10 years ago,” she says.

If you’ve been sitting on the sidelines of emerging markets and are ready to get back in, Jurrien Timmer, director of global macro for Fidelity Investments in Boston, recommends buying particular stocks and geographically targeted funds rather than a broad index or exchange-traded fund spanning the entire developing world. Every market will react differently to the prospect of rising interest rates, a higher dollar and lower energy prices, he warns.

Fixed Income

These days, holding bonds is all about hedging against the unforeseen. It’s hard to envision any capital appreciation like we saw in 2014. Still, Greenberg doesn’t think an expected U.S. interest rate hike spells disaster for fixed income. “It’s going to be a bit of a headwind,” he says.

Adds Timmer: “I think rates can stay low for quite a long time, and so I wouldn’t be in too much of a hurry to abandon the fixed-income portion of my portfolio.”

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