Coutts released its investment outlook on 8 December, forecasting a largely positive outlook for the year ahead. However, the bank also recognised that it is becoming increasingly difficult to diversify portfolios when bond yields are so low.
The bank outlined numerous opportunities within equities for investors in the coming year – notably within Europe, Japan, China, UK large cap and global banks. Coutts forecasted the global economy to grow at 3.5% in 2015 and 4% in 2016. It suggested that a fall in oil prices will prompt an increase in consumer spending in developed markets, where disposable income is freed up from a windfall in lower fuel bills.
Coutts are particularly favourable towards European equities amidst forecasts of economic recovery in Europe. The bank suggested that Europe’s profit cycle is at a favourable stage in comparison to the US where company margins (the ratio of profits to sales), which have reached record highs, are now falling. Company margins in Europe, on the other hand, are low and rising – providing an opportunity for investors.
The bank’s forecast towards China was also relatively optimistic. It acknowledged that the economy was likely to slow in the coming years as China shifts from being driven by investment to being powered by consumption. However, one particular opportunity was cited in Hong Kong listed H – shares, which at present, trade at a 20% discount to China-listed A-shares. H-shares present a 14% return on equity.
Alan Higgins, CIO UK at Coutts said: "This past year saw some big swings in financial markets, driven more by sentiment than any significant change in the economic fundamentals. We think any lingering gloom is likely to clear up as we head into 2016 and believe global growth will be surprisingly strong. We see the year ahead as full of opportunity for investors prepared to take some risk and go against the crowd."
The private bank explored alternative solutions for diversification of portfolios in a climate where incredibly low government bond yields make it difficult to generate income whilst protecting a portfolio against potential equity losses. Alternatives explored included high yield or "junk bonds", which have delivered total returns of nearly 70% compared with 22% for US Treasury bonds, since the 2008 financial crisis. However, these are clearly a riskier bet than more traditional fixed income options.
Coutts also suggested that corporate bonds are a good allocation for investors, as they are giving good returns for a low risk of default.
UK property was also seen as a viable diversifier. Although commercial property yields have been driven down, Higgins said that they still offer an attractive premium over bonds, with strong rental growth supporting capital values.