The overall environment is accommodating to equities – the global economy is continuing to grow at a modest pace. Earnings will be the driver this year – we’re not looking for P/E expansion. Also European markets seem to be good value and offer opportunities.
We are advising an underweight position in fixed income, or short duration to a client’s benchmark. We prefer credit to sovereign debt still. For the first half of the year we are also constructive on high yield. Over the medium to long term we expect yields to lift higher as the global economy continues to improve.
Hedge funds can reduce volatility in a client’s portfolio and we are expecting increased volatility this quarter – we’re coming off a strong year in equities and will be seeing some sector rotation. Equity long/short strategies have been performing well and we expect that to continue in the first quarter. We’re also keeping an eye on commodities as they had a rough 2013. It’s too early to make a call on gold rebounding, and real estate offers some selective opportunities.
We are overweight in Europe and maintain an equal weighting in the US right now. We are constructive on US equities, but expect Europe to outperform. In emerging markets we remain selective, and are more positive on Asia’s emerging markets within the region.
We don’t see a global recession on the horizon and the markets are taking the tapering well. Still, when everyone is talking about moving in the same direction (being in equities) then investment professionals need to be vigilant. We think equities is a good place to be but diversification is important and fixed-income duration needs to be kept short over the next two years as rates rise. So long as inflation remains subdued and earnings growth momentum continues then equities should maintain a relatively positive footing.
