Having a global outlook is certainly next year’s strategy for many financial institutions such as Credit Suisse, AMP Capital and Standard Life Investments.
The strong Australian dollar and stretched local share market mean global equities, particularly European markets, offer better value over the coming year, according to Credit Suisse director and chief investment officer Andrew McAuley.
“We are overweight Europe, overweight FTSE and overweight DAX,” Mr McAuley said.
“German companies in particular are gaining advantage from recovering emerging markets and from their main customers in developed markets,” he said.
“Europe isn’t out of the woods but it looks like the systemic risk that we were worried about at the beginning of this year has been dealt with by the European Central Bank (ECB) offering unlimited liquidity.
“They’re not offering quantitative easing (QE) as such, but they have said to banks in Europe: ‘If you need liquidity, we can give it to you’.”
To back up its view, Credit Suisse has used the Purchasing Managers Index (PMI), below, as a key economic indicator.
The United Kingdom’s recent PMI was 58.1, a strong indicator that the UK economy is well on the way to recovery, Mr McAuley said.
“Basically, anything above 50 means the economy is picking up speed and anything below 50 is essentially a slowdown,” he said.
Looking at the breakdown of European PMIs, Germany is clearly the top performer.
Not surprisingly, Credit Suisse included German companies Adidas, Allianz, Deutsche Bank and SAP in its top 30 stock picks for 2014.
Looking to the Global PMIs chart above, the United States has seen the strongest PMI in recent months; however Credit Suisse sees more value in European equities.
“European valuations look more attractive than the US,” Mr McAuley said.
In the latest edition of the Standard Life Investments Global Perspective report, released yesterday, Standard Life Investments head of global strategy Andrew Milligan believes 2014 will be a battle between economic fundamentals and political obstacles for the US.
“Government decisions, especially about structural reforms but also fiscal policy and regulation, could periodically have a major impact on market sentiment, generating turbulence in the prices of many financial assets,” Mr Milligan said.
“Forecasting the direction for financial markets is never easy, especially at turning points in the policy-making cycle or when politics have a major effect on investor sentiment,” he said.
“Equity markets can make new highs on the back of supportive policy and a continued economic recovery, although structural reforms are certainly necessary to prevent more economies sliding into secular stagnation.”
For investors still keen to keep their investments local, the Australian share market offers far greater returns than bank deposits.
“If you go back a few years ago the cash yield on Australian shares was below the average term deposit rates, whereas now the return on shares is well above the term deposit rate,” AMP Capital head of investment strategy and chief economist Shane Oliver said.
“It makes sense for investors who do have a heavy exposure to term deposits or bank deposits to look around,” Mr Oliver said.
“The share market comes with a bit more volatility, but it is certainly looking reasonably attractive,” he said.
But the real value proposition for 2014 is China, toward which both AMP Capital and Credit Suisse are turning their attention in a big way.
With the recent announcement of bold economic reforms, coupled with bottoming growth, Chinese equities are looking very attractive. And very cheap.
“We really like things to be cheap, and we really like to buy things nobody else likes. Chinese equities ticked both those boxes,” AMP Capital head of portfolio management Debbie Alliston said.
“China is one of our top ideas for next year,” added Credit Suisse’s Andrew MacAuley.
