Developed countries’ equity markets are set to continue their upward trend, according to a report by Union Bancaire Privée, Outlook 2014 – "Healing".
Jean-Sylvain Perrig, CIO at Union Bancaire Privée, said: "In 2014 the Fed should be the first to reduce its liquidity injections; the markets are likely to welcome this as the economy is on the mend – you can’t stay in intensive care forever!"
That being said, central bank support will continue for developed economies, helping them through their gradual recovery, so equities are anticipated to thrive in 2014.
Growth settles in
The world economy’s wounds are healing. 2014 should see more of the same as 2013: a speed-up in growth, a stronger G7 recovery and continued dovishness from the central banks.
The market cycle should enter a more mature stage under the impetus of brisker world trade and, above all, a rebound in corporate capital expenditure. This will restore developed countries to their full growth potential and continue to heal the scars of the 2008 crisis.
Patrice Gautry, chief economist, UBP said: "rather than going back to how it was in 2006-2007, the market is more likely start a new, more lasting growth cycle, driven by the corporate world and its investments".
Wide disparities between regions will remain but developed countries will be the ones to foster change and boost growth. The US is stepping up the pace of its re-industrialisation fuelled by its renewed energy resources, whilst Europe and Japan are progressing with their reconstruction processes.
As for emerging countries, they will have to rebalance their economies, which have been too reliant on investment, by favouring consumption whilst polishing their competitiveness. Central banks will help throughout this recovery process, but should be careful not to withdraw their support too soon.
Gautry added: "Monetary policy will have a major role to play in this return to growth, even though words and actions will vary considerably from one central bank to the other."
Sharp uptrend for equities
Equities are still the asset class of choice.
Perrig said: "European equities should offer the best performances because the currently high risk premiums are very likely to drop."
After a decade of outperformance by emerging markets and commodities, a trend reversal is taking place and equity markets, especially in developed countries, are set to take over as the best performers.
In contrast with the emerging world, the growth-inflation balance in developed countries should improve and companies there, unlike their emerging-market peers, should further increase their margins and profitability.
Given this, fund flows are in the direction of developed markets.
Perrig added: "As growth has yet to reach its full potential in developed countries, companies with high long-term earnings growth potential should catch the interest of investors."
Such firms are to be found in the sectors with a promising medium-term outlook, such as e-commerce, social networks, 3D printing and cloud computing – areas which could eventually refashion society.
In fixed income, long government bond yields should keep rising, especially in the US, and inflation forecasts should remain stable.
This would have a positive effect on confidence, visibility, growth and therefore earnings. Against this backdrop, we still consider sovereign debt unappealing; only high-yield corporate bonds, with their high coupons, still have return potential for 2014. Short durations should nevertheless continue to be favoured.
Lastly, hedge funds are set to benefit from the environment described above and perform well in 2014. Alternative investment managers with long/short equity and event-driven strategies seem to be the best-positioned to reap the benefits of the current economic and financial climate.