A study by Baring Asset Management into the best and worst performing asset classes shows U.S. equities were the best performing asset class in 2014, returning 13.3% for investors.

While the results once again shows the strength of the North American equities market, they also highlight the significant volatility that investors face, with many of the best and worst performing assets changing dramatically again from one year to the next.

“In Barings’ view, the study again shows why multi-asset investing, which has an unrestricted mandate to dynamically move into and out of asset classes, continues to find favor with investors looking to achieve targeted returns with potentially lower volatility than investing in equities alone,” said Hayes Miller, head of asset allocation, North America, at Barings, in a commentary.

The U.S. and the rest of the world seem to be going down two different paths, but to the same end, according to Miller. “Comparing and contrasting the U.S. position with those in Europe and Japan, it is clear how diverging situations are in place: currency strength vs currency weakness, monetary tightening vs monetary easing,” he said. “In our view, this divergence will create a convergence in earnings growth and market valuations, with Europe and Japan converging from modest valuations to the higher multiples enjoyed by the U.S. market.”

In Barings’ view, while the U.S. economy remains strong and on course to deliver real growth in excess of 3% in 2015, with corporate profit margins high, borrowing costs low, bearable tax levels and cheap energy, there is a triple threat looming over the U.S. equity market which could result in a loss of momentum in favor of other investment opportunities.

The first threat is a potential change in monetary policy by the Federal Reserve. “Given the positive economic data, we believe the Fed will move rates to a higher level in June, July or September,” said Miller. “The second threat is the strong US dollar, which is up approximately 10% in trade-weighted terms over the past year, and the third threat is wage inflation.”

In 2015, after a multi-year outperformance by US stocks, Barings believes investors should be looking elsewhere to identify markets which are supported by a competitively weak currency and by more stimulative monetary policies.

One such opportunity exists in Japan. In terms of monetary policy, the country remains extremely accommodative – quantitative easing and corporate governance improvements will continue to stimulate exports via a weak currency and to support corporate profitability. Earnings growth expectations are approximately 12%, and there have been several positive earnings revisions since mid-2014.

Featured image by Myst/Dollar Photo Club