Paul Terhorst On Global Investment Opportunities In 2015

More Predictions For The Year Ahead—Dollar Highs, FATCA Woes

What does 2015 hold for the investor with a global perspective?

First, I believe the Fed will raise interest rates in 2015 and that higher rates will rattle the stock markets. I’ll predict that U.S. stocks will end flat for the year, call it plus or minus 5%, more likely on the minus side.

My prediction for a weak stock market goes in the face of the presidential cycle. Normally the year (2015 in this case) before an election year delivers strong stock-market returns, as politicians pull out the stops. But I believe higher rates will dampen the electoral party.

I expect lower oil prices for a while, leading to low inflation. Friends and others doubt official inflation numbers in the United States. They think real inflation must be higher than 2% or so. We can quibble about the inflation index; we all have our own market basket of goods. But the government’s numbers serve as a useful benchmark.

Incidentally, with low oil prices airlines can reduce their oil surcharges. As of this writing, that reduction has yet to happen, and I’d like to point out to the airlines that it’s kind of silly tacking on a fuel surcharge with record-low fuel prices.

I dislike gold as an investment, and gold has weakened over the past few years after a long run-up before that. To me gold is a fear indicator, up in scary times, down in good times. I see little fear on the horizon, and Russia might have to sell gold to shore up its economy. I look for another weak year in gold.

I think Europe will do a little better next year, especially in the second half. Europe has already double-dipped, with recession in 2008 and again in 2011. I think Europe will avoid a triple dip in 2015, but it’ll be a close call. And I think, and hope, by the end of the year Europe will pick up with help from Italy, Spain, and Portugal.

The euro should weaken even more, call it 1.15 to the U.S. dollar sometime this year.

I believe the fighting in Ukraine will remain a contained border dispute rather than a full-fledged Russian invasion. I traveled to Ukraine in July and sensed that western Ukraine would just as soon see the eastern part of the country go. “They’re all drunks and drug addicts over there,” a wild-eyed local told me, referring to Russians in eastern Ukraine. If Russia should try to annex eastern Ukraine I doubt Ukraine will do much about it. The world might slap more sanctions on Russia, which will create incentives to get around them. Like someone said, gatekeepers only keep out those who don’t know where the holes in the fence are.

In Latin America, Venezuela might default on its debt in 2015. Lower oil prices have hit Venezuela’s leftist government hard. Meanwhile Argentina might finally cure its default. Both the default (Venezuela) and cure (Argentina) could slip into 2016.

FATCA—capital controls on U.S. citizens and foreign banks—will hurt Latin America especially. Americans wanting to move to the region will have an even tougher time getting banks to transfer money to buy a house, develop real estate, or invest. The U.S. Treasury has finally begun to profess concern about the problem. Still, I doubt the U.S. government will act. I detect a distinct lack of empathy in Washington, D.C. The notion seems to be, if Americans move out, we don’t deserve banking services. Ridiculous.

I think Asia will outperform the rest of the world, and China will grow at 6% or so. Obama and Xi Jinping just agreed on a new visa deal, providing for 10-year visas in both countries. Vicki and I picked up the new visas last month. Assuming the United States follows through, larger numbers of Chinese will travel and invest in the United States, especially California.

India should improve growth in 2015 as Modi pushes through market reforms. As always the bureaucracy will resist. Five decades of socialist rule tends to destroy the spirit. But small, steady progress there should unleash buried talent.

China and Europe will have to do their part to get the world economy cranking. Leftists will continue to plague South America; I think growth there will stall.

Finally, I think the Chicken Littles will be proven wrong again. The United States will do fine. Fighting in Ukraine, the Islamic State, and Ebola should have little market impact.

I plan to have a fun-filled 2015, and I hope you do, too. I offer these predictions to promote discussion and perhaps even action. Good luck.

Paul Terhorst