CIO Year Ahead, the annual outlook published by UBS Wealth Management’s chief investment office (CIO), predicts the global economic recovery will gather pace in 2014, with global GDP growth rising to 3.4%.
Yields on government bonds and other high-rated bonds in developed markets, which have been historically low in recent years, should begin to normalize as economies expand.
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Alexander S. Friedman, Global Chief Investment Officer at UBS Wealth Management, says: "In 2014, the overall environment for return-seeking investors should be positive. Entering 2014, our highest tactical conviction is to be overweight asset classes with higher potential for returns, including equities and US high yield credit."
Other highlights:
The US will set the pace for the developed world, as it is furthest along in its deleveraging efforts.
The Eurozone, after emerging from recession in 2013, should continue to grow, albeit slower than the US. Company profits in the Eurozone also have room to expand.
Japan will soon face a test with respect to the success of "Abenomics," Prime Minister Shinzo Abe’s stimulus program. Further quantitative easing from the Bank of Japan is likely to weaken the yen further.
Emerging market GDP growth is expected to accelerate slightly, from 4.5% to 5%, though risks remain for countries faced with current account deficits.
Strategic Asset Allocations: A longer-term view
The CIO Year Ahead also includes details on the CIO’s guidance regarding its Strategic Asset Allocations (SAAs). The SAAs represent the CIO’s fundamental allocations to various asset classes over the next five to seven years and are designed to help clients fulfill their long-term investment objectives.
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By GlobalDataAs Global Chief Investment Officer Alexander S. Friedman states, "It makes sense for investors to take stock of some of the structural shifts underway and re-orient their strategic portfolio holdings."
The SAAs, which are subject to periodic review, feature an increased weighting in credit, including high-yield bonds and emerging market sovereign and corporate bonds, and a sizeable allotment to hedge funds, depending on the specific SAA.
"The beginning of the end of quantitative easing will bring about rising bond yields, undoubtedly affecting the returns available in high-rated developed world bonds," writes Friedman. "We believe credit should play a more integral role in investors’ strategic allocations than may have been assumed in recent years."
A key tenet of the CIO approach is diversification, which select hedge funds may offer in exchange for moderately lower liquidity. The CIO expects diversified investments in hedge funds to outperform traditional holdings in the five-year time frame due to their lower average volatility and greater ability to protect investors against losses.
Commodities in aggregate are likely to suffer from soft demand and mildly negative returns in 2014 and beyond. While gold, for example, has merits as long-term "insurance" against extreme risks such as hyperinflation, the CIO has made no SAA allocation to it or any other commodity, although investors can still capture short-term opportunities in tactical allocations. The CIO also prefers to hedge exposure to currencies where relevant on a strategic, longer-term view and to seize opportunities in the asset class on a tactical, shorter-term basis.
