Winter Q1 2014
Growth hiccups or taper tantrums?
The coming year is likely to see a shift in investor focus from growth to the monetary policy backdrop. This move will be driven by the recovery in the US economy and efforts by the US Federal Reserve to bring the current phase of Quantitative Easing to an end. Although the Fed have been at pains to point out that “tapering is not tightening”, markets are likely to extrapolate and regard reduced asset purchases as advance warning of higher interest rates. This may mean 2014 has a number of ‘taper tantrums’ in store where yields jump higher and equities move lower, adding volatility to markets.
Recovery on track, inflation contained
We believe that the world economy is on track for a modest recovery as monetary stimulus feeds through and fiscal headwinds fade in 2014. Despite potential upgrades to growth in the UK and US, we still believe that the balance of risks are skewed toward lower rather than higher inflation, and anticipate inflation to remain well contained.
Equities favoured for earnings growth
In this environment we maintain an overweight position to equities and an underweight position to bonds. Although equities are no longer looking undervalued on current earnings we retain our position to gain exposure to forecast earnings growth which should underpin returns. We do however expect returns from equity markets to be lower than in 2013 and to be more volatile given the various risks to economic recovery. Stock selection remains important as the dispersion of returns between companies may widen as earning growth prospects differ. Bonds remain overvalued and susceptible to yield increases as tapering commences. Where appropriate, we continue to hold a material exposure to transparent and liquid ‘absolute return’ funds, to counterbalance our lack of enthusiasm for cash and bonds and to give protection should markets fall. We also favour property for its yield characteristics while capital values have started to recover. Increased confidence in the UK economy is also likely to benefit the asset class.
The opinions contained herein are those of the author and do not necessarily represent the house view. This document is intended to be for information purposes only. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Cazenove Capital does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This does not exclude or restrict any duty or liability that Cazenove Capital has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Cazenove Capital is part of the Schroder Group and a trading name of Schroder & Co. Registered Office at 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. For your security, communications may be taped and monitored.