Emma Wall: Hello and welcome to the Morningstar series, 'Market Reaction'. I'm Emma Wall and here with me today is Richard Jeffrey, Chief Investment Officer of Cazenove Capital Management. Hello, Richard.
Richard Jeffrey: Hello.
Wall: So I thought today we talk about your outlook for 2015 and perhaps and the risks that are coming up for investors. How economic uncertainty may filter down to people in UK investing. What some of the big risks you think that we should be aware of?
Jeffrey: Well, I think there are number of risks, but the biggest risk is actually on our own door step and it’s growth within the Eurozone. What we've seen over the past two or three years is that the Eurozone has really struggled to leave recession behind it. And even in the last year many of the key economies have simply flat lined. And of course the UK is heavily exposed to the Eurozone and it is more damaged by the Eurozone than it is helped by the better growth trends in United States and the United States has genuinely picked up momentum. So I think that’s one of the key risks for the UK.
Wall: I think that lot of people don’t realize that Europe is our biggest market in terms of who we do business with, 70% of the FTSE's revenues come from outside the UK and what goes on in the Eurozone really does effect UK consumer, UK investor, UK stock market.
Jeffrey: Very definitely about 44% of UK exports of goods go into the Eurozone. So it's absolutely key market and it is very definitely holding the UK back at the moment.
Wall: And one of the other flags perhaps is what's going on in Japan the third arrow maybe not coming off or maybe coming off what are your opinions on that?
Jeffrey: I don’t think anything has really changed in an underlying sense in the Japanese economy at the moment. What they have engineered of course is a very sharp depreciation in the currency. So that probably makes them slightly more competitive in export markets. But it also caused risks getting a situation of competitive devaluations within that area. But the key thing is whether or not this government can get changes to take place in the way the domestic economy behaves and there is absolutely no sign that that is happening. There are few signs that industry is behaving any differently and there are few signs that the consumer is behaving any differently.
Wall: And one of the key things that has changed for UK investors that is investors in the UK who have all been just investors in the FTSE, is their opinion about emerging markets. This time last year people were very wary of them, but that has started to warm up. People are now getting back into emerging markets. What does the next 12 months hold?
Jeffrey: Well valuations in emerging markets began to look more attractive and I think that’s really what attracted – pulled investors into some of those markets. But I still think we have to be very careful. Emerging markets really thrived when there was growing excess demand in the west. And that was the period prior to the recession. But of course it was that excess demand and the extent of imbalance within the west that led to the depth of the recession.
Coming out of recession we are now establishing new growth norms. Those growth rates are not nearly as fast as the ones that we saw prior to the recession. We're trying to contain excess demand, we are trying to reduce the trade deficits of the west and that is making it a much harder export environment for developing economies particularly the manufacturing economies, but also growth that commodity produces, feed the manufacturers. So I think in terms of economic activity that's going to remain a difficult area.
Wall: So what do investors do then because you have outlined there are three areas of which people may need to be wary is it about having no exposure tool or just making sure everything is balanced.
Jeffrey: I think it is to an extent making sure everything is balanced and not putting too much on one throw of the dice. There are lots of economic uncertainties around and I think we are still having to adopt psychologically to this changed growth norm, which is much lower and our expectations of returns from financial assets have to come down. And we've come out of a period not in 2014, but 2013 and 2012 when the returns from equities around the world were actually quite exciting, where actually 2014 was a more normal year when the returns come into single digits.
Wall: Richard, thank you very much. This is Emma Wall for Morningstar. Thank you for watching.
