In terms of market opportunities, how do investment experts see the next five years panning out?
Luca Paolini, Pictet Asset Management chief strategist, believes 2013 marked the end of the most vigorous phase of the bull market in developed world stocks. The next five years will see financial markets enter a new phase, he says, in which central bank stimulus – for so long a positive influence on investor sentiment – will have less of an impact on asset class returns.
Mr Paolini says economic growth and changes in the earnings prospects and credit standings of the world’s corporations will have much greater bearing on the trajectory of financial markets in the next five years.
He says macro-prudential measures, aimed at preventing asset bubbles, will become more popular and may have a bearing on interest rates, while higher corporate taxes and minimum wage regimes will impact corporate profitability.
He sees no cheap asset classes in developed markets, due to weak growth, rising inflation, deleveraging and moderate monetary tightening.
“I expect to see a bear market in developed government bond markets, where yields have reached unjustifiably low levels, whereas emerging market sovereign bonds, whose valuations are relatively attractive, should see percentage gains in the mid-to-high single digits.”
He says credit markets will gain, but their returns will be below both the historical average and inflation. Emerging markets stocks will also fare better, as companies’ earnings and revenue growth recover from depressed levels.
As for currencies, he believes the Chinese renminbi will evolve into a major investment currency, as the realignment of developed and developing world currencies gathers momentum.
In brief, Mr Paolini recommends increased allocation to emerging market assets, long/short hedge funds, alternatives such as infrastructure, and long-term growth themes, such as clean energy, water management and agriculture.
Didier Saint-Georges, a member of the investment committee at Carmignac Gestion, expects slow, but improving growth in Europe, which is reflected in Carmignac’s positions in Italian, Spanish and Portuguese sovereign debt and financial corporate bonds.
But he says the outlook for [European] growth is much poorer than elsewhere.
“Our enthusiasm is mainly directed towards certain interdisciplinary themes, such as energy, technology and healthcare, and very strong local trends, such as in India, where we think Narendra Modi’s election victory heralds real change. We remain vigilant, as the slowness of the recovery leaves Europe particularly vulnerable to external shocks,” says Mr Saint-Georges.
Kerry Craig, JPMorgan Asset Management global market strategist, is cautiously bullish on the US, where he says economic improvement, low interest rates and the current lack of geopolitical shocks and economic imbalances, support the case for a cautious equity overweight in portfolios, in spite of higher valuations.
He says real interest rates are likely to rise, but structural changes in the demand for risk-free assets could lead to neutral interest rates that are lower than historical levels.
“The implications are that investors holding longer-dated bonds could see smaller losses, real assets should continue to do well and equities should see higher valuations.”
He sees opportunities in emerging markets as more compelling given attractive valuations, reduced currency risks and efforts by emerging markets’ central bankers and regulators to attract foreign capital. But fundamental catalysts, including stronger earnings growth and improved sentiment about China, are still needed to strengthen the case for emerging markets equities.
Ayesha Akbar, Fidelity Solutions portfolio manager, expects the US to continue to lead a global recovery.
“Although much of the short-term recovery has already been priced into the market, there are still plenty of opportunities in the US and expectations remain relatively high, but investors will now be looking to the Fed for signs of how it intends to manage the tapering of quantitative easing.”
Elsewhere, Ms Akbar says Japanese companies continue to be sensitive to other parts of the world due to the country’s significant export sector, while the government’s introduction of a new consumption tax this year could threaten demand from domestic consumers.
As for China, she welcomes the Chinese government’s attempts to rebalance its economy. That said, for a country as large as China, she says the ramifications of a slowdown are significant.
“Regionally, this will continue to hurt emerging markets,” Ms Akbar explains.
“From an asset class perspective, commodities are likely to suffer from decreased Chinese demand.”
Ultimately, she sees the overall global recovery as looking set to continue, but warns that recoveries never occur in a straight line or spread evenly across regions, sectors and asset classes. “Investors looking forward in the longer term should diversify as far as possible,” she adds.
So in spite of uncertainty as to when US rates will rise and how the unwinding of quantitative easing will pan out, there is continued optimism about US equities and opportunities in emerging market asset classes.
But strong conviction stockpicking and asset allocation will become ever more important, as the hunt for yield continues apace.
