Trying to spot profitable stocks ahead of the game is one of the traits of successful investing, and one investment firm has come up for three possible equity and fixed income strategies for the next year.
Stephen Cohen, chief investment strategist for iShares EMEA, suggests developed equities have romped home as the winning asset class for 2013 – and forecasts what might happen in 2014.
The favourite is a 55% chance that markets will stay low for longer
“The most likely prediction to come true for 2014 is where monetary policy stays more or less the same. Growth will increase but stick below trend, with consumer spending restricted by wages failing to rise too much,” said Cohen.
If this is the case, he favours this strategy:
- Look for US equities as political uncertainty is unlikely to trigger much market volatility
- Don’t treat all merging markets the same – Korea and Taiwan are placed to perform better than most
- European peripheral bonds have profited from European Central Bank rate cuts and offer better prospects than core European countries ·
- Financial data is building to support Japan heading for a deflation exit. Check out currency hedging opportunities as the Yen weakens
Growth breaks out
“We estimate a 25% chance of a ‘growth breaks out’ scenario with corporate spending and bank lending rising in Japan and Europe, and China’s GDP growing as the country progresses on economic reforms,” said Cohen.
- Emerging market equities will benefit in this scenario as investors reallocate funds.
- Brazil has underperformed in 2013 due to monetary tightening and a deteriorating fiscal position. The country will offer value if emerging market growth impresses the markets in 2014
- If growth breaks out, interest rates will rise faster than expected. For fixed income, investors should focus on high yield and shorter duration bonds and interest rate hedged strategies
Back to the bad old days
“The least likely scenario is for global economic imbalances to tip over. Europe’s recovery will lose pace and emerging markets will suffer as liquidity is withdrawn. China’s reforms will come at the expense of growth. We see this as a 20% chance,” said Cohen.
- Minimum volatility equities will cushion global equities in a risk-off scenario
- Gold could come back into favour as a crisis hedge
- If rates remain low, the search for income will continue and dividend stocks with attractive valuations could prove popular