80% of global equity markets capitalization is currently underpinned by zero interest rates, and 50% of government bonds globally yield 1% or less.  The ramifications for mainstream assets when the Fed raises rates, expected in 2015,  will therefore be far reaching.

Surveyed from the foothills of December, in 2015 investors will have to battle weak economic growth, low inflation, disappointing levels of investment and capital underutilization. This is in sharp contrast with the benign vision that has faced us for the past few years.

The halving of the oil price since June, and the associated Russian rouble melt-down, are just two potentially long-lived issues for the global economy to grapple with in the New Year.

Gold Will Suffer From Rising Interest Rates; Cheap Oil Raises Concern Over Deflation

Other interlinked factors unsettling markets include the following:

• Investors will no longer be exposed to optimal market conditions for asset price appreciation. As the credit cycle finally tightens, after being held at 25bp since 2008, investors will be affected by higher levels of volatility. Will corporate America deliver the higher level of earnings to justify the richer valuations investors are being asked to pay?
• Outside the US, the recent dollar appreciation is a problem. The latest figures by the Bank of International Settlements show that $5 trillion worth of dollar denominated debt has been issued by banks and governments during 2014. Should the dollar continue to strengthen, defaults could spread beyond likely candidates such as Argentina and Venezuela.
• Economic conditions in Europe are bad and getting worse. The European Central Bank will have to stave off deflation through a widely expected program of Quantitative Easing likely to start early in 2015.
• A faster than expected (or desired) economic slowdown in China necessitated the first cut in interest rates in November, the first for two years. GDP in 2015 is expected to be below 7% for the first time since 1999.
• Heightened geopolitical risks. To balance its budget, Russia needs an average oil price of $105 p/b, Iran $131 p/b and Iraq $101 p/b. This looks otherworldly, as the International Energy Agency cut its forecast for global oil demand last week for the fifth time in six months. Brent crude forecasts for 2015 remain substantially below $100 p/b, and some insiders predict prices will drop as low as $40 p/b. Why not?

Volatility to rise as credit tightens and geopolitics take centre stage. Will Strong $ Hurt US earnings?

…and one more thing; credit tightening will be accompanied by higher levels of market volatility. Compared to historic trends, much lower returns are forecasted from bonds (negative real returns) and equities (4%). This creates a climate in which investors will need to filter extensively to avoid the investment pitfalls associated with a deteriorating geopolitical situation and weak economic fundamentals.

Looking further afield to seek out alternative assets such as agriculture can enhance a portfolio’s performance. Farmland prices in northeast Brazil  have been rising by 20% annually for the past three years.