Our view is that growth will be driven by the US as its economy continues to recover. It is less broad-based than some would wish – with capital spending not yet kicking in. Europe is following with lower growth rates but some encouraging signs. In emerging markets those with a strong balance sheet, such as China and north Asia, are profiting, but emerging markets as a whole are no longer driven by China’s commodity boom. And the rising long-term US interest rates have had an impact. So emerging markets need to be looked at in a more differentiated way now. We also don’t expect to see such high equity returns as in 2013. The recovery has been discounted in, and it’s more realistic to expect 6% to 10%. We don’t believe the cyclical bull market in equities is over, but we will see more volatility and market swings than in 2013.
Q: What advice are you giving clients on their fixed-income allocation?
We don’t believe it is realistic to expect high returns from government bonds; interest rate-sensitive fixed-income instruments can even mean losses to investors. For returns, we suggest good-quality US and European high-yield bonds or emerging market hard-currency bonds returning some 3% to 5%.
Q: To what extent will absolute-return investments have a place in a client portfolio next year?
Absolute-return products are becoming more palatable now that it’s clear that other investments that were deemed safe are no longer so and returns cannot be expected from such places as government bonds. We would look for sufficiently transparent and diversified multi-asset portfolios and hedge funds.
Q: What regional opportunities do you foresee this year?
Europe looks more obvious than the US. In western Europe we like Germany as it is the most cyclical and valuations look good; also in Italy cyclical stocks provide an opportunity. In emerging markets we’re looking for structural reform and healthy external balance sheets such as China. Also Taiwan and Korea. We’re staying away from weak economies that need to get their houses in order, such as India and Brazil.
Q: How long do you foresee the window of opportunity lasting?
We think at least another two to three years given the slowness of this cycle. We are in the phase when recovery is gathering pace, but returns will slow down, and then in the final phase we will see a final leg-up, but we are not there yet. An optimist would say we have another five or six years, but that is the best case in my view.