With credit growth around the world likely to be muted as a result of constraints, both internal and external, economic growth is likely to remain moderate and inflation low. Nominal bond yields are low in historic terms around the world, but positive in real terms. A tightening of monetary policy in the US and UK is well discounted, so yields should remain low. Bond returns in 2015 should therefore be moderately positive.
Global equities trade on a multiple of about 14.5x 12-month forward earnings. This is reasonable but not cheap. Earnings growth is likely to be in high single digits in 2014 and 2015. With the economic cycle likely to be long, owing to moderate growth exhausting spare capacity only slowly, earnings growth should continue into 2016 and probably 2017. Equity markets are likely to generate returns in line with earnings growth plus dividends, meaning low double digits annually. A rerating to a higher forward multiple is more likely than a derating.
All property markets are local. We are happy to invest in companies and markets offering good rental growth and the potential for asset value gains through refurbishment and redevelopment on top of reasonable rental yields. We continue to favour primary over secondary or tertiary in terms of country, location, asset type and buildings in spite of the lower yield.
Moderate demand growth and restricted supply should allow prices to recover. Companies are focused on raising returns from flat prices, so such a recovery will be positive for share prices. The long-term trends remain; developed world demand for energy is in decline and the energy intensiveness of emerging markets growth will fall, too. Chinese growth will become much less metal intensive. Technology will increase the fuel efficiency of planes and motor vehicles and the replacement cycle means that this will continue.
Cash is unattractive because of the good returns available from investment assets – the greater the risk, the higher the return. Still, low inflation means that the real return from cash is only modestly negative, so from time to time it will be worth holding cash to await the attractive tactical opportunity in markets provided by occasional bursts of volatility.
Multi-asset fund manager, Aviva Investors
We are moderately bullish on corporate bonds. Although investors’ ongoing hunt for extra returns has pushed the yield spread over government bonds to its lowest level for some time, companies’ balance sheets are generally in healthy shape and the level of defaults is expected to stay low. As for government bonds, we expect European markets to outperform, because the European Central Bank is inching towards what is bound to be a controversial step – namely the purchase of government debt.