Well-reasoned arguments on both sides of every major market
This could turn out to be a challenging but exciting year. Whether it is the major developed equity markets or fixed interest, there are well-reasoned arguments that they are either mid-way through a longer bullish trend or that they are overpriced and set for a significant correction. To a lesser degree, emerging markets and commodities either have further to fall or they are cheap and the best contrarian bets for 2014. We think markets will be far more volatile this year and feel that setbacks could present useful buying opportunities.
Tapering, deflation and the world's greatest poker player
It is generally agreed that the main focus for the year will be on how well the US and UK economies cope with further tapering of quantitative easing and rising interest rate expectations. History suggests that at least one of the central banks will make a hash of it; the question is whether this will result in a return to recession or inflation rising out of control.
We shall also want to see how the ECB reacts to the prospect of deflation, whether China oversteps the mark in managing down its growth, and whether emerging markets will rise phoenix-like from the ashes to be this year's star turn. In July 2012, Head of the European Central Bank Mario Draghi said he would do whatever it took to protect the Eurozone from collapse, and still no one has called his bluff.
Recovery looks sound, but much is already in the price
The US and UK economies look in good shape, though both will be tested by further withdrawals of central bank money and rising bond yields this year. It might sound a touch cynical, but we think the UK will continue its recovery into the 2015 General Election; George Osborne will issue his own forward guidance to the Bank of England on when he expects rates to start rising — and not before.
The tricky bit is that even if these economies do continue to grow, quite a lot of that is already priced into the stockmarkets. We really need better-than-expected growth and for this to translate into higher earnings to drive share prices further.
Europe is a hard one to call. There is no denying the quality of many European companies operating profitably across the globe; on the other hand, the Eurozone is a failed political experiment that has only been bailed out by the world's greatest poker player.
A note from the desk
Welcome to the first of our monthly market updates. Whilst you are always free to make contact with us, we thought it might be useful to keep you informed of our investment views and how we are positioning your investments to take advantage of changing market conditions. As always, should any aspect of this commentary prompt a question, we would welcome the conversation.
Martyn Charlwood · Managing Director
Bonds underwhelm, property holds steady, and setbacks may offer opportunity
Bond yields are still too low, but we do not subscribe to the Armageddon school of thought; there will undoubtedly be volatile periods, but yields might only end the year at around 4%, perhaps even a touch less. Commercial property should remain a steady performer, offering more yield and less risk of capital loss than fixed interest.
We think that markets will be far more volatile this year and feel that these setbacks could present useful buying opportunities. The main developed markets carry the risk of already pricing in a good deal of good news, whilst emerging markets and commodities present an intriguing contrarian case for those prepared to weather the volatility.
The Eurozone is a failed political experiment that has only been bailed out by the world's greatest poker player.
We prefer equity income, property and absolute return over fixed interest at the lower-risk end, and remain invested in developed markets with selective emerging market and commodity exposure across balanced and higher-risk portfolios.
Income and stability over bonds
On our lower-risk portfolios we prefer a blend of equity income, property and absolute return funds to fixed interest assets. With bond yields still too low, these alternatives offer a more attractive combination of income and capital preservation.
Developed markets with less Europe
Across the balanced and higher-risk portfolios we remain invested in the main developed markets but with less money in Europe. We believe there is more mileage in Japanese and Asian equities.
Adding to emerging markets
We feel that emerging markets offer more value going forward and added to our position in November. We have also retained a small weighting in gold and commodities.
Important information
This article is a marketing communication intended for general information only. It does not constitute personal advice, a recommendation, or an offer to buy or sell any investment. If you are unsure whether an investment is suitable for your circumstances, please seek personal advice.
Past performance is not a guide to future performance. The value of investments and any income from them can fall as well as rise. Capital values are at risk and not guaranteed. Forecasts and views expressed in this commentary represent our assessment at the time of writing and are subject to change.
To discuss how this commentary applies to your own portfolio, we would welcome a conversation.
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