Review of 2014
2014 was supposed to be the year that posed the first serious challenge since 2008 to unorthodox monetary policy, testing bond prices, equity and property values. The basis of that expectation, that economic output and capacity utilisation would continue to expand, was right as far as most developed nations were concerned. But the unexpected counter to that was that both industrial and agricultural commodity prices were weak, dragging consumer price indices into, or close to, deflation. Any normalisation of monetary policy was postponed and with it any test of equity prices, which generally extended the gains notched up since 2009. The reprieve for bonds meant long-duration bonds outperformed all but the strongest equity markets.
Any sense that financial markets were merely marking time was increased by very low equity volatility (barring the briefest of intervals of false alarm). With low volatility came a fairly narrow dispersion between local currency returns in different equity markets. This left currency movements to explain much of our modest rebalancing activity during the year.
Though returns from our core building blocks were far from spectacular, they were better than many popular alternative investment opportunities where expectations were more adversely wrong-footed by some of the big developments of 2014: China dramatically slowed its commodity imports, the oil price collapsed and Russia reverted to type.