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Where to invest: Asset allocation tips for 2014

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24/12/2013
We ask the experts what next year holds for key economies and sectors.
Where to invest: Asset allocation tips for 2014

US

“Tapering should provide a utopia for equity investors in the US”

The US central bank, the Federal Reserve, finally took the plunge in December, announcing it would be withdrawing its massive stimulus package by $10bn per month from January 2014, taking it from $85bn to $75bn.

While this is good news as it signals a recovering US economy, there are still uncertainties about the US’s long-term debt problem.

Joanna Shatney, head of US large cap equities at Schroders, says that despite announcing the start of tapering – the phrase commonly used to describe the stimulus withdrawal – the Fed will remain accommodative against a backdrop of a slow GDP growth environment.

She adds: “This scenario should provide a utopia for equity investors in the US because it allows for earnings growth and multiple expansion. A slow growth environment should also be conducive to stock picking, as in a moderate earnings growth environment, winners and losers are more clearly delineated.”

UK

“The UK recovery is still very tentative”

The general consensus is for UK stock markets to continue their upward trajectory next year, with analysts Goldman Sachs and Citi tipping the FTSE 100, London’s blue chip share index, to break through 7,000.

The 7,000 mark would represent an all-time high for the FTSE 100, surpassing the 6,930 level reached in 1999.

However, David Coombs, a multi-manager at Rathbones, is not getting too excited about the FTSE 100. Instead he is focusing on micro, small and mid-cap companies which have outperformed their large cap peers this year.

“It is becoming increasingly difficult to find value in these areas because of outperformance, but there are enough stocks in the universe to take advantage of a return to growth,” he says.

Meanwhile, James Griffin, a fund manager at Fidelity, warns that the UK recovery is still very tentative.

“We need to see some follow-through from the housing market recovery in the form of positive wealth effect so the recovery can truly take hold and broaden out,” he says.

Overall though, he remains encouraged by improvements in the UK economy, which appears to be on the road to a slow but steady recovery, driven by a strengthening housing market, improving consumer confidence and stabilising employment trends.

Japan

“Japan remains my favoured developed market for 2014″

Abenomics – the aggressive economic package advocated by the current prime minister Shinzō Abe – put Japan back on investors’ radars in 2013.

The economy grew in the first quarter of the year but started to slow in the second quarter due to the realities of driving change through a large, complex and conservative society.

Experts are cautious on the outlook for the country.

“It is important to be realistic about the likelihood of a sudden transformation in Japan,” warns Fidelity’s head of Japanese equities, Alex Treves.

“Indeed, prime minster Abe may have done himself a disservice by raising foreigners’ expectations too high – but equally the prospect of long-term improvement in Japan’s outlook is very much alive.”

Crucially, shares in many Japanese companies look cheap, so ignoring Japan is not an option, Treves says.

Adrian Lowcock, senior investment adviser at Hargreaves Lansdown believes Japanese shares continue to look good value and taking into account a positive outlook for Japan over the next three years – the timescale Abe has to implement his structural policy reforms – means “now is a good time to invest in Japan”.

To sum up, Darius McDermott of Chelsea Financial Services says: “”I still like the look of Japan and it remains my favoured developed market for 2014.”

Emerging Markets

“Emerging markets now require a more nuanced strategy”

Global emerging markets (GEMs) have underperformed developed markets for the past three years due to a combination of weaker-than-expected economic growth and earnings, a strong dollar and more recently, concerns over the potential ramifications of policy stimulus tapering in the US. These factors have led some commentators to suggest that the positive structural story for emerging markets is over.

However, Schroders head of emerging market equities, Allan Conway, says fundamentals such as young and growing populations, low debt levels and rising disposable incomes, are very solid.

Also, share valuations are very attractive and appear to be pricing in a lot of bad news.

Dominic Rossi, chief investment officer at Fidelity, says emerging markets now require a more “nuanced” strategy that recognises the divergent drivers within the emerging world.

“Over the 2003-7, the rising tide of China and the weaker dollar/strong commodity prices lifted all boats. We are in a different environment now where the underlying heterogeneity of emerging markets has reasserted itself. Some markets will perform poorly, some will perform well,” he says.

Europe

“European stocks appear cheap relative to all regions

There is no denying that Europe has been through a hairy time over the past few years.

Investors have been on a rollercoaster with talks of defaults and sovereign debt crises, a possible Greek exit from the euro, Spain’s pain and who can forget the troubles both economically and politically that have besieged Italy?

However, experts are now becoming increasingly bullish on Europe.

Mark Burgess, chief investment officer at Threadneedle, says: “For the first time in three years we believe Europe is likely to return to positive GDP growth in 2014, but earnings growth is likely to be steady rather than dramatic. Stock pickers, however, could be handsomely rewarded when concentrating on companies with strong business models, robust finances, experienced managements and ideally dominant market positions.”

Mark Nichols, fund manager, F&C European Growth & Income, says that from a valuation perspective, Europe is looking appealing on a number of measures.

“While ratings have understandably moved somewhat higher in recent months in anticipation of better growth coming through next year, we would say that European stocks appear cheap relative to all regions, whether on a dividend, earnings or book-value basis.”

Investors should note, however, that risks still remain. The experts at AJ Bell Youinvest believe it is unlikely the eurozone will stay out of the news for long.

Looking at next year, Portugal’s general election and ongoing political chaos in Italy are both potential flashpoints.

The eurozone is by no means risk free, and the slightest hint of bad weather may make the markets begin to question the euro’s credibility again.

Azad Zangana from Schroders adds: “Investors can look forward to a sluggish recovery across Europe through 2014. We expect core Europe – that’s Germany, France, Sweden and even Austria – to really outperform peripheral Europe thanks to the export-orientated nature of those economies. As demand across the world picks up, those economies will be particularly well-placed to take advantage of that improvement.

“On the other hand we have peripheral Europe. We do expect them to come out of recession and start to recover, but at the same time, because of the ongoing need for austerity, demand will continue to be very weak, consumer confidence will continue to be low, and of course, because the banks need to recapitalise, we struggle to see how investment is going to recover across those countries.”

 

Property

“Property looks well placed to do well regardless of the global economic recovery”

Mark Burgess, chief investment officer at Threadneedle, expects strong returns from commercial property next year.

He says: “We expect the UK commercial property market to deliver good returns in 2014, as the economic recovery continues to positively impact upon occupational demand. The main beneficiaries should be the South East, as well as logistics and warehousing markets across the country. Top provincial office markets are also showing some signs of recovery. We believe investors will continue to be attracted to commercial property next year and competition for stock will place upward pressure on capital values.”

Looking at the global picture, Jim Rehlaender, fund manager at Schroders, believes property generally looks well placed to do well regardless of the global economic recovery.

He says: “The big unknown in 2014 is whether an economic recovery globally continues to gain traction, particularly in the US, China and Europe. Either way, we believe that property looks well placed. Even if economic growth proves disappointing, the absence of new supply coming onto the market will be good news for property values, given the strength of investor demand. And if the global economy takes off, investors should also benefit from rental growth.

Rehlaender adds: “The UK property market is likely to remain strong but, after a good run, investors will need to be selective about which companies they bet on in 2014.”

Commodities

“The gradual slowdown in the rate of growth in China will continue to limit the upside”

Commodities have generally been weak in 2013. In particular, gold and silver have fallen as investors have accepted that low inflation is likely to remain for the foreseeable future and the lack of return is a burden for those seeking income.

Ted Scott, director, global strategy at F&C Investments, adds: “The price of oil has been responding to political risk as much as economic fundamentals and it is clear there is still a political risk premium valued into the price.

“With the prospects of shale becoming progressively more important for oil importing countries, the outlook is for further weakness in the oil price unless there is a major political event, especially in the Middle East. For industrial metals, the gradual slowdown in the rate of growth in China and other emerging market economies will continue to limit the upside in their prices.”

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