Street Global Advisors (SSgA)
the asset management business of State Street Corporation has announced its global outlook for 2014, highlighting five key investment themes that investors should consider as they position their portfolios for the year ahead.
Fixed Income in Transition
- Recovery will become more broad-based and self-sustaining in nature next year. The US looks set to enjoy accelerating growth. Europe’s recovery may still be fragile but economic activity levels have bounced off particularly low levels and the region is poised for modest growth
- Emerging markets typically benefit most from a global recovery and their long-term outlook remains positive despite a turbulent 2013. In 2014, emerging markets will be impacted by conflicting forces: a strengthening global economy on one hand but a strengthening dollar on the other. Valuations, however, are not demanding and expectations are low.
- In China, the ‘Chinese Dream’ initiative to reshape the economy by beginning the shift from an export-driven model is a positive development. SSgA anticipates growth of about 7.5% in 2014, but risks still persist.
- Although the prospect of extreme risk events have diminished, there is still reason for caution as there are many complex interlinking parts and growth remains sluggish. Stress points remain and the normalization of monetary policy could prove challenging.
- For the first time in years, SSgA expects that monetary policies will begin to diverge, although major country administered rates will likely remain unchanged. The US Federal Reserve is expected to begin a tightening cycle by tapering its asset purchases, which could in turn signal the beginning of a transition to more normal rates for those economies that are performing well.
- However, concerns about rising rates will boost demand for certain fixed income assets favouring credit over duration, such as high yield and loans, absolute return to cash benchmarks, and short duration corporate and floating rate notes.
- Eurozone growth is particularly favourable to European peripheral debt. SSgA expects that there will be rallies in peripheral stocks and that small caps and high yield should continue to perform well. SSgA is positive on the outlook for Spanish and Italian equities.
- The UK is set to be the best G10 performer but may experience inflationary pressures. SSgA is upbeat on the outlook for UK corporate bonds and the UK financial sector.
Over-valued Safe Havens
- Current bond and equity valuations offer good upside for 2014, but investors will need to be selective. Emerging Markets are sensitive to policy makers’ decisions, at home and abroad and countries that fail to address reforms adequately are less deserving of investor attention.
- While the period of 10% per annum growth may be in the past for China, it is still set to displace the US as the world’s biggest economy by 2030.
The Changing Face of Correlations
- Because a path to elimination of Federal Reserve asset purchases is now on the table, and economic prospects appear consistent with tapering, government bonds seem to have lost the safe-haven appeal that served them well during 2011 and 2012.
- The broad lack of value in sovereign paper extends to other fixed income segments, narrowing further the options for yield-seeking investors. Also as central bank policies have progressively stripped return from short-term instruments, cash has come to offer very little compensation for a risk-averse posture as well.
- The market environment of 2014 continues to pose a challenge for asset allocators to build portfolios with the proper level of diversification. A more nimble approach such as tactical asset allocation will be more appropriate to be able to adjust allocations quickly.
- SSgA favours short biased strategies, managed futures, real estate and cash as diversifiers with stable low correlations for 2014.
Commenting on the global market outlook for 2014, Rick Lacaille, global chief investment officer at SSgA said, “If stabilisation was the message in 2013, recovery is the watchword for 2014. While we are not discounting potential risks, like government and central bank policy changes or geopolitical issues that could disrupt the growth story, there are plenty of positives to catch the investor’s eye for 2014.”