Australian stocks had a pretty good year in 2014, unless you were sitting in a country that had a very good year. The benchmark S&P/Australian Securities Exchange 200 Index posted a total return in local currency terms of 5.6%, which is exactly what the standard world stock benchmark, the MSCI World Index, reported for last year. 

But few developed countries beat the U.S. last year, with the Standard & Poor’s 500 Index posting a gain, including dividends, of 13.7%. 

Accounting for the Australian dollar’s depreciation against the U.S. dollar, the S&P/ASX 200 was actually down 2%.

The AE Portfolio posted a 1.3% loss in U.S. dollar terms. The Aggressive Holdings declined by 11.1%. However, the Conservative Holdings were 6.6% to the positive.  

The global economic outlook is hazy for 2015. We see a continuation of U.S. economic strength and the Federal Reserve returning to business as usual after years of easy money and low interest rates post–financial crisis.

This combination should ensure that the U.S. dollar continues to appreciate.

But developed-world inflation will be driven down by the plunge in oil prices, increasing the pressure on other major central banks to maintain or increase stimulus.

The major uncertainty for investors: whether global growth accelerates as a result of lower commodity prices, monetary stimulus and a strengthening U.S. recovery sufficiently to offset deteriorating conditions in Asia and Europe.

And the major global worry for 2015: disinflation verging on deflation. 

But asset prices should benefit as central banks respond to the deflation threat.

Australia will continue to struggle amid the wind-down of the early 21st century commodity super cycle, and the Reserve Bank of Australia will likely announce at least one and perhaps two rate cuts. This should help drive the aussie down toward the RBA’s stated goal of USD0.75, which is good for Australian exports.

But rate cuts should provide some economic stimulus and also drive investors into dividend-paying equities in search of higher investment income.

And low cost of debt combined with solid free cash flow, coupled with relatively high dividend yields, should help overcome a comparatively weak Australian economy and drive double-digit gains for the S&P/ASX 200 in local currency terms.

As we detail in this month’s In Focus feature, the major Portfolio move will be to increase exposure to Australia-based equities that generate significant revenue streams in foreign markets, including the U.S.

We also favor companies with the ability to respond to sluggish growth with asset sales that lead to operating efficiencies, effective cost-cutting initiatives and reduced capital expenditures.

In Closing

We look forward to your comments, questions and suggestions on the changes we’ve made to AE and any other issues or concerns related to the service.

Please let us know what you think or post any questions you may have to the Stock Talk forum at www.AussieEdge.com. And join me for the next installment of my monthly online chats with subscribers on Wednesday, Jan. 28, 2015, at 2 p.m. 

Go to www.InvestingDaily.com/Aussie-Edge/live-web-chats/ for more information and to sign up to receive an e-mail notification for the event. I stick around to answer just about every question asked, so if there’s something on your mind that isn’t addressed in an issue or on the Stock Talk forum, this is a great opportunity.

I look forward to chatting with you. And thanks for reading Australian Edge.