Fears that the U.S. Federal Reserve would cut back its bond-buying purchases too soon or too aggressively sent markets reeling in 2013. When the tapering actually began, in January 2014, world markets merely shrugged — and the program wrapped up in October with very little fanfare.
Now investors are focused on when the U.S. central bank will raise interest rates, and by how much. Market participants have differing opinions, but most agree that a repeat of last year’s turmoil is unlikely.
“The important thing to realize is that the taper tantrum reflected the Fed’s surprising the market,” observes Candace Browning, head of global research at Bank of America Merrill Lynch in New York. “We think the Fed has been extremely careful about the message of rate hikes and that the market is pricing in a late cycle start — sometime in the fourth quarter — and a slow cycle once it begins. We don’t expect another tantrum.”
Nonetheless, investors are likely to be anxious until they know exactly when and to what extent the central bank will act. And that’s just one of the concerns on their minds. Slowing growth in China, ongoing weakness in the euro zone, an uneven economic recovery in Japan, and heightened geopolitical risks in the Middle East and Ukraine, among other issues, will have money managers turning to the sell side for insight and updates on the latest developments in the year ahead — just as they did over the past 12 months, when these same issues dominated the headlines.
During the course of the year, Institutional Investor asked portfolio managers and other buy-side professionals to tell us which of their sell-side peers were offering the most effective guidance. The results of our 12 annual research team surveys were published separately, but when the totals are aggregated, Bank of America Merrill Lynch claims the title of II’s Top Global Research Firm of the Year. This year marks the bank’s fourth straight appearance atop this roster, with its highest total to date: 260 positions. That’s three more than it won last year and 39 more than J.P. Morgan, which finishes in second place for a fourth year. It claims 221 spots, 11 more than in 2013. These are the only two firms whose aggregated totals exceed 200.
In third place overall is Morgan Stanley, which climbs from fourth place after increasing its total by 20, to 174. Deutsche Bank slips one rung to No. 4 even though its total plunges by 34, to 134. This is the second consecutive year in which the German financial services firm has sustained double-digit losses; its total fell from 193 in 2012 to 168 last year.
Credit Suisse and Barclays are neck and neck in fifth and sixth place, respectively, with totals of 113 and 112.
Click on The Top Global Research Firms in the navigation table at right for the final results for all 100 firms that earned a spot on an II research team in 2014.
When it comes to analysts and teams considered the best in their respective categories, BofA Merrill and J.P. Morgan are far out in front of other firms, with 65 and 60 first-place finishes, respectively. Barclays ranks third when firms are measured by this metric, notching 27 sector-topping appearances, followed by Deutsche Bank, with 26. All told, analysts from 43 firms earned at least one No. 1 position.
Our surveys cover a combination of developed and emerging economies. When results of each classification are viewed separately, BofA Merrill is slightly ahead of J.P. Morgan in Developed Markets — the firms claim 145 and 144 spots, respectively. Barclays comes in third, with 96 positions. (See The Leaders: Developed Markets).
The order changes somewhat when coverage of emerging markets is considered. BofA is again on top, winning a total of 115, but Morgan Stanley jumps to second place, with 88 positions — ten more than Credit Suisse, which ranks third. (See The Leaders: Emerging Markets).
II surveys also generally include a mix of equity and fixed-income categories. When totals are viewed strictly by these securities types, BofA Merrill leads the equity lineup, with 193 positions; Morgan Stanley secures the second tier, earning 152 spots; and J.P. Morgan lands in third, with 146. When only fixed-income categories are considered, J.P. Morgan tops the roster, with 75 spots — more than one third of which are for analysts and teams considered the best in their respective sectors. BofA Merrill wins 67 positions, earning No. 2, followed by Barclays in third, with 45.
In October the International Monetary Fund lowered its global real gross domestic product growth forecast for 2015, from 4 percent to 3.8 percent. Economists at BofA Merrill are slightly less sanguine. “We have global growth at 3.7 percent in 2015,” Browning reports. “The U.S. will really stand out. It has seen some significant healing — Washington has become less of a source of shocks — and we are looking for growth of 3.3 percent.”
The firm also expects the U.K.’s economic recovery to continue and predicts 2.6 percent expansion of that market. “Contrast that with the rest of Europe, where we predict growth of just 1.2 percent,” Browning adds.
J.P. Morgan is making similar projections. “The U.S. recovery is on solid footing going into 2015, and we are forecasting 3 percent growth, or double the forecasts for the euro area and Japan,” says Joyce Chang, the firm’s New York–based director of global research.
However, this particular rising tide is not lifting all boats — yet, anyway. “Overall, 3.7 percent global growth sounds pretty good, but some countries are doing much better than others,” Browning notes. “Countries that are really distressed — Ukraine, Russia, Argentina, Venezuela — are likely to remain that way for some time. We have Japan muddling along at 1.6 percent [growth] and China at 7.1 percent. Australia will be impacted by the slower growth in China, and in emerging markets we think Mexico will outperform because of its strong links to the U.S.”
Brazil, which not long ago was the growth engine of Latin America, will limp along at 1 percent, she adds.
Chang also sees difficult days ahead for many developing economies. “Emerging-markets growth is likely to struggle again in 2015, and we are forecasting growth at only 4.1 percent,” she says. “Much lower commodities prices are adversely impacting many of the major emerging-markets economies. We have [emerging Europe, the Middle East and Africa] and Latin America growth below that of the U.S., at only 1.9 percent and 1.7 percent, respectively. With China slowing and Brazil and Russia growing below 1 percent, India is the only bright spot in the BRICs.”
That view is widely held, thanks largely to the decisive victory won by probusiness Prime Minister Narendra Modi and his Bharatiya Janata Party last May. The BofA Merrill team expects India’s economy to expand by 6.3 percent in 2015, Browning says, while the IMF is marginally more optimistic. “India has recovered from its relative slump,” the Washington-based organization declared in an October report, when it affirmed its fiscal 2015 growth forecast of 6.4 percent.
The story is very different in the euro zone. Output has slowed in the three largest economies — Germany, France and Italy — prompting the IMF to warn that the chances of the economic union’s sliding into recession had doubled since April, to 38 percent.
In early December the European Central Bank reduced its GDP forecast from 0.9 percent to 0.8 percent for 2014 and from 1.6 percent all the way down to 1 percent for 2015. ECB president Mario Draghi disclosed that the policymakers were discussing the possibility of introducing a bond-purchase program but felt they needed more time to assess the impact of policies already implemented.
“The pressure for the ECB to do sovereign quantitative easing is clearly rising given the delayed recovery and concerns about deflation,” J.P. Morgan’s Chang explains. The central bank’s balance sheet stood at €2.05 trillion ($2.52 trillion) in late November, and that figure is likely to grow by €750 billion over the next two years, she adds.
Browning also believes that a program is in the offing. “They’ve already adopted some pretty unconventional policies — cutting short rates into negative territory, buying asset-backed debt — but so far none of that has been very effective,” she points out. “GDP growth is less than 1 percent, unemployment is at about 11 percent, and inflation is falling.”
Some sort of sovereign quantitative easing will probably be introduced in the first quarter, she adds, and include a whole range of government debt from all member countries.
“It will be open-ended. They will raise their balance sheet by at least €1 trillion, thanks to the purchases,” Browning says. “Basically, they’ll be perceived as fiddling while Rome burns if they don’t do anything.”
Aggressive actions by both the ECB and the Bank of Japan, Chang says, will dampen any major rise in ten-year yields on U.S. Treasuries. “U.S. rates will rise but only gradually, and we forecast ten-year U.S. Treasury yields at 2.7 percent at midyear,” she predicts. (The yield on the benchmark note stood at 2.28 percent in early December.)
Memories of October’s rally, when a flight from risk helped push the yield to 1.86 percent, its lowest level in 18 months, “are also fresh, and interest rate dynamics could be similar to what occurred in 2004–’06, when Treasury yields remained range-bound for more than a year after the start of the cycle,” she says. “We see the peak of the tightening cycle only at the end of 2017, with the Fed funds rate near 3.5 percent.”
The BofA Merrill crew is calling for the Fed to raise its benchmark rate by 25 basis points in September — its current target is 0 to 0.25 percent — and then an additional 25 basis points every other meeting after that, Browning says. “There will be a modest tightening in financial conditions, but the global economy should be able to withstand those rate hikes, considering there will be additional easing from other central banks,” she adds.
The big story for 2015, in her view, will be the change from an environment of falling rates and rising corporate earnings to one of higher rates and increasing earnings. “What that means is that the asset returns we’ve seen in the last couple of years — double-digit investment returns — are going to be lower, probably in the area of 4 to 8 percent,” Browning contends. The S&P 500 Index, which stood just under 2,100 in early December, will likely end 2015 at 2,200, she adds.
One change she would like to see in the new year: a return of so-called animal spirits, spurring corporate leaders to use their cash on hand to invest in growth. “Investors don’t have any money, banks don’t have any money — corporates have all the cash,” Browning quips. “In 2015 we would hope to see that cash deployed in ways that foster growth.”