Equities set to head the pack

This article is part of
Winter Investment Monitor - December 2013

The Office for Budget Responsibility has revised its 2014 economic growth forecast for the UK up to 2.4 per cent, echoing the Bank of England’s 2.9 per cent prediction.

This is good news – the UK has fought hard in the past couple of years to return to prolonged periods of significant growth.

Jeremy Batstone-Carr, director of private client research investment strategy at Charles Stanley, says: “The evolution of the growth projection is interesting insofar as the official forecast now envisages 0.7 per cent growth in the first quarter [of 2014], 0.7 per cent growth in the second and third but a slight slip, to 0.5 per cent, in the fourth quarter of 2014.

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“In the context of generally positive recent data releases and still very ‘uppish’ survey evidence these numbers look to be erring very much on the safe side. This implies that independent consensus might have been on the verge of raising its domestic growth forecast again.”

According to Mr Batstone-Carr, the improvement in projected growth could cause the Bank of England to “edge away” from its monetary policy position earlier than the current consensus of the latter half of 2015.

“The first hike might come in the first quarter of 2015, ahead of the scheduled general election in May,” he says.

On a global basis, Valentijn van Nieuwenhuijzen, head of strategy at ING Investment Management, predicts that although central bank policies worldwide will continue to be accommodative, there will be a transition from liquidity towards economic growth and corporate profit growth as prime market drivers.

“Most of the tapering risk has been priced in and markets seem to better understand the difference between tapering and tightening (ie, rate hikes),” he says. “Under Janet Yellen, the next chair of the US Federal Reserve, the forward guidance principle will be refined further, and rate hikes still appear to be at least two years away.

“If the onset of tapering no longer leads to investors expecting substantially more and/or earlier rate increases, there will be much less upward pressure on long-term interest rates, and therefore much less of a negative impact on risky assets like equities and real estate compared with earlier this year.”

For many investment professionals, equities remain the favoured asset class as we head into 2014. Mr van Nieuwenhuijzen and Mr Batstone-Carr both see continued opportunities in equity markets and Luca Paolini, chief strategist at Pictet Asset Management, says the “improvement in global economic conditions should eclipse concerns over the looming withdrawal of US monetary stimulus, and lend support to equity markets”.

Christopher Sexton, investment director at Saunderson House, adds that aside from the macroeconomic factors, equities are supported by strong company balance sheets, reasonable valuations and real asset qualities in the face of inflation.

He adds, however: “We continue to recommend that clients retain allocations to strategic bond funds, which have limited vulnerability to an eventual rise in interest rates, and to index-linked gilts, for protection against an inflation shock.