Threadneedle chief investment officer Mark Burgess said after many years of quantitative easing supporting the performance of ‘risk assets’, 2014 will be about selecting the right investments as the global economic recovery is put to the test.
“Financial markets will have to re-engage with reality against a backdrop of significant macro and policy challenges, and investors need to be alive to the consequences of this changing environment and subsequent volatility,” said Mr Burgess.
Mr Burgess said if quantitative easing is withdrawn too hastily or if companies fail to deliver earnings growth, this could bring volatility to markets.
According to the outlook, investors are moving their focus away from market liquidity towards company fundamentals, following the Federal Reserve’s announcement in September that it will begin to taper its stimulus.
“Companies will have to step up their game and earnings will have to pick up significantly if equities are to sustain or even come close to the rally we have seen in developed markets during 2013,” said Mr Burgess.
Threadneedle said it remains bullish on equities overall, but expects regional and sector performance to vary significantly.
Mr Burgess said US earnings have recovered and surpassed their previous peak, with this year’s returns close to 30 per cent.
While he said this was unlikely to occur in 2014, US equities are still attractive due to a combination of low energy and labour costs supporting company margins.
“We think the best performers will be companies in the technology and consumer discretionary sectors,” said Mr Burgess.
Threadneedle was less positive about European markets, with only half of all European companies beating earnings expectations.
Mr Burgess said the region was still experiencing relatively poor growth dynamics compared to the rest of the developed world.
“While for the first time in three years we believe Europe is likely to return to positive GDP growth in 2014, earnings growth is likely to be steady rather than dramatic,” said Mr Burgess.
“Stock pickers, however, could be handsomely rewarded when concentrating on companies with strong business models, robust finances, experienced managements and ideally, dominant market positions.”
Mr Burgess predicts emerging markets will be a “mixed bag and a wildcard” in 2014.
He said, while equity valuations are attractive, history shows rising US Treasury yields and a stronger US dollar can negatively impact emerging market returns.
“Mexico points to a year of solid growth linked to the US economic recovery and the country’s lower manufacturing cost base compared to China,” he said.
Mr Burgess expects quantitative easing tapering to end the bond market rally, but for yields to move upwards.
He also expects the UK commercial market to deliver good returns in 2014.
