British private bank Coutts has launched its 2014 investment outlook, which highlights the lender’s view of the economic landscape and key investment themes in 2014.
“Although global stock markets recovered in 2013 as investors’ optimism returned, we believe policymakers face a triple challenge of indebtedness, quantitative easing (QE) and changing demographics,” said Gary Dugan, chief investment officer for Asia and the Middle East at Coutts.
“As a result, we believe we are in for a sustained period of low growth and low interest rates.”
Despite Coutts’ prediction of low economic growth, global investors seem optimistic about the coming year.
According to a Bank of Merrill Lynch survey, up to 71 per cent of investors polled believed that the global economy will strengthen. The survey also found that the conviction in the global economy is far stronger now than 12 months ago when only 40 per cent of them expressed optimism.
The report also found that around 41 per cent of the investors believe that global profits will improve in the coming year, compared to 11 per cent in the previous year.
Key investment themes from Coutts Outlook 2014
Keeping it safe
Low bond yields have been causing investors anxiety for years, but there are ways to enhance yields without taking too much risk. European and UK investment-grade bonds can offer protection against interest-rate uncertainty at a reasonable price. Some emerging-market corporate bonds in Asia may play an important role in portfolios for investors willing to accept the greater risks inherent in this asset class.
Stocking up on income
Dividend growth pays when real interest rates are negative, but don’t just focus on those that yield most. The income play has been popular for some years, so selection is important. We would look for sectors that offer net dividend yields that are historically above average, and with room for dividend growth.
Quest for growth
Investors need to drill down deeper to unearth growth potential. We still prefer equities over bonds as we enter 2014. Emerging markets continue to have long-term growth potential. In terms of equities, shares in the luxury goods sector trade at a discount to many world equities. Technology companies offer growth potential although you may want to look beyond the sector’s giants for the best opportunities.
Political instability remains a threat to Europe’s fledgling recovery. Japan’s politicians are playing with high stakes. Low nominal growth rates in developed nations mean tax hikes are a real possibility.
Who dares wins
Low interest rates mean that investors need to step up the risk ladder in order to achieve returns. High-yield bonds are now closely correlated to equities. Consider absolute-return funds to diversify portfolios. Cash deposits will continue to lose money in real terms (i.e. after inflation) for savers.