Investment Outlook January 2014
Post on 06-May-2015
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Positive market views are commonplace after a strong year because investors have a tendency to extrapolate the recent past into the future.
US stock market in 20131900
1850
1800
1750
1700
1650
1600
1550
1500
1450Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
S&P 500 Composite – Price Index
Thomson Datastream, S&P 500 Price Index from 1.1.13 to 1.1.14
Past performance is not a guide to future returns. When investing in overseas markets, changes in currency exchange rates may affect the value of an investment.
Performance over five years2009 2010 2011 2012 2013
S&P 500 12.6% 18.7% 2.9% 10.9% 29.9%
Source: Thomson Datastream, from 31.12.08 to 31.12.13 with income reinvested in £ terms.
On the back of a 30% rise in the S&P 500 index in 2013, it is hard to avoid the temptation to project further gains this year, however, more of the same in 2014 is, broadly speaking, my investment view today. There are risks to this view, as there always are, but overall this feels like a good time to remain fully invested.
This investment outlook should not be viewed as advice or an invitation to purchase any specific fund or security. It simply represents our considered outlook for the next 12 months or so. To arrive at this market view I have tapped into the wealth of investment expertise within Fidelity’s investment team, supplemented by wide reading of other views “on the street”.
I present this view in the hope that you will find it a helpful framework for your investment decisions in the year ahead. I intend to update the view each quarter, looking forward another 12 months at each review, although I expect changes to occur only gradually. At Fidelity, we have always promoted long-term investment and discouraged investors from chasing the latest investment fad.
InveSTmenT OuTlOOkFidelity Personal Investing’s market and investment view, January 2014
“ As we enter 2014, my greatest worry is that few people are worried. That level of complacency about the investment outlook has at times in the past been a contrarian signal for investors. However, more of the same, perhaps less turbo‑charged, remains my central view.”
By Tom Stevenson, Investment Director
2
main investment themes for 2014
1. We prefer equities to bonds and commodities. There is selective value in commercial property. Residential property in the uk looks underpinned by policy and limited supply.
2. Within equities, the uS and Japan are the most attractive markets. The uk looks better than the rest of europe. emerging markets are exposed to the effects of the Fed’s taper.
3. Within bonds, high yield looks most interesting for income seekers. Strategic bond funds are the best way of investing in fixed income for most investors.
4. China is the most interesting contrarian play this year, offering investors exposure to long-term growth at a historically cheap valuation.
Contents
Asset classes . . . . . . . . . . . . . . . . . . . . . . . .3
Equities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
Property . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
Commodities. . . . . . . . . . . . . . . . . . . . . . . . .6
Equities – a regional perspective . . . . . . . . .7
Bonds – in focus . . . . . . . . . . . . . . . . . . . . . 12
Investment risks in 2014. . . . . . . . . . . . . . . . 14
Important information: Please be aware that past performance is not a guide to what might happen in the future. The value of investments and the income from them can go down as well as up and investors may not get back the amount invested. This information does not constitute investment advice and should not be used as the basis for any investment decision nor should it be treated as a recommendation for any investment. Investors should also note that the views expressed may no longer be current and may have already been acted upon by Fidelity. Fidelity does not give investment advice. If you are unsure about the suitability of an investment, you should speak to an adviser. Before you invest, please ensure you have read Doing Business with Fidelity and the key Investor Information Document (kIID) and associated charges; or Fund Specific Information Document (FSI), relevant to your chosen fund(s). These documents give you all the information you need to know about Fidelity, including details of the objective, investment policy, risks, charges and past performance associated with the fund(s). Instructions on how to access these documents can be found at fidelity.co.uk/importantinformation. If you do not have a computer or access to the internet please call Fidelity on 0800 41 41 61 to request a printed copy of the documents. The Full Prospectus is also available on request from Fidelity.
3
Asset classes
A key decision every investor needs to take when constructing a portfolio relates to the balance between different asset classes. With economic recovery underway, we have a preference for equities over bonds and commodities.
UK GDP growth (quarter‑on‑quarter)
2009
2.0%
1.5%
1.0%
0.5%
0%
-0.5%
-1.0%
-1.5%
-2.0%
-2.5%
-3.0%2010 2011 2012 2013
Source: Thomson Datastream, 9.1.14
Past performance is not a guide to future returns.
We see selective opportunities within commercial property. For investors who are nervous after 2013’s strong run in equities, cash is the safest haven despite its still negligible yield.
Some investors will have the confidence to use my comments as a framework for making their own asset allocation decisions, perhaps using Fidelity’s Select list to narrow the search to a short-list of funds which our experts particularly like. For those who prefer to leave asset allocation to professional managers, there is a wide range of multi-asset or balanced funds.
Important information on the select List: The funds on The Select list are hand picked from the range available on our fund supermarket. The funds featured in this brochure are from the December 2013 update. For more information on how these funds are selected visit fidelity.co.uk/select. We believe that The Select list provides an excellent choice of funds for anyone constructing their own investment portfolio, although it is not a recommendation to buy. equally, if a fund you own already is not on The Select list we are not recommending that you sell it – the list represents funds and managers that our experts particularly rate.
Select list funds Mixed Assets – BalancedArchitas Multi Asset Active Intermediate
F&C Multi Manager navigator Distribution
Henderson Cautious Managed
Investec Cautious Managed
Mixed Assets – DefensiveAXA Defensive Distribution
Jupiter Distribution
Prudential Managed Defensive
threadneedle Defensive equity and Bond
Mixed Assets – FlexibleCF Miton strategic Portfolio
Invesco Perpetual Managed Growth
Investec Managed Growth
Jupiter Merlin Growth Portfolio
Mixed Assets – GrowthAberdeen Multi Asset
AXA Framlington Managed Balanced
Investec Diversified Growth
Jupiter Merlin Balanced Portfolio
threadneedle Global equity and Bond
Mixed Assets – IncomeAberdeen Managed Distribution
Aviva Investors Distribution sC1
Fidelity Multi Asset Income
Premier Multi Asset Monthly Income
4
equities
GLoBAL equIty
The backdrop for equity investors is generally positive with a global recovery underway, untroubled yet by rising inflation. This should keep monetary policy loose over a one year time horizon.
Falling inflation enables interest rates to remain lower for longer
UK Consumer Prices (left hand scale)UK Bank of England base rate (right hand scale)
6.0%5.5%
5.5%
4.5%
4.0%
3.5%
3.0%
2.5%
2.0%
1.5%
1.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%200920082007200620052004 2010 2011 2012 2013
Source: Thomson Datastream, 14.1.14
Past performance is not a guide to future returns.
Despite the strong performance of many markets in 2013, valuations do not yet look excessive and sentiment is not overly positive. This is good news because it suggests that some investors remain on the side-lines, ready to enter the market when they are confident that the economy is on a clear upward trajectory. A further positive for the market is an increase in mergers and acquisitions activity, another sign of improving sentiment. The recovery from the low reached in early 2009 is nearly five years old but previous bull markets have lasted longer than this and I believe stock markets look capable of continuing to climb a “wall of worry”.
Important information: When investing in overseas markets, changes in currency rates may affect the value of your investment. Investments in small and emerging markets can be more volatile than those in other overseas markets.
GLoBAL equIty InCoMe
Income remains in short supply in an environment of generally low interest rates around the world. Re-invested income is a major contributor to total returns from many investments and it can help to smooth returns as well as being a sign of corporate strength and prudent management. I believe equity income investing will continue to be a theme as long as interest rates remain at today’s historically low levels.
The benefit of re‑investing dividends
FTSE 100 (without income reinvested)FTSE 100 (with income reinvested)
220
200
180
160
140
120
100
80
60
200920082007200620052004 2010 2011 2012 2013
Source: Thomson Datastream. 14.1.14
Past performance is not a guide to future returns.
Performance over five years2009 2010 2011 2012 2013
FTSe 100 (without income reinvested) 22.1% 9.0% -5.6% 5.8% 14.4%
FTSe 100 (with income reinvested) 27.3% 12.6% -2.2% 10.0% 18.7%
Source: Thomson Datastream, 31.12.08 to 31.12.13. Performance of the FTSe 100 index, with and without income reinvested.
Select list funds Global EquityBny Mellon Long term Global equity
ecclesiastical Amity International
F&C stewardship International
Fidelity MoneyBuilder World Index*
M&G Global Growth
Rathbone Global opportunities
schroder Global Climate Change
templeton Growth
Global Equity IncomeAberdeen World equity Income
Lazard Global equity Income
newton Global Higher Income
sarasin Global Higher Dividend
*This fund replicates the performance of the MSCI World Index
5
Bonds
Bonds underperformed equities significantly in 2013. I expect more of the same in 2014. While bonds continue to provide useful diversification and can be a good source of income, investors would be unwise to view them as risk-free now that the next move in interest rates is, at some point, likely to be upwards.
With the unemployment rate approaching the threshold set by Bank of england governor mark Carney last summer, the turn in rates may be sooner than some investors have expected. He has made it clear that the 7% jobless rate is merely a “way station” on the road to higher interest rates but higher yields remain a threat to fixed-income investors.
UK unemployment falling towards Bank of England threshold
8.5%
8.0%
7.5%
7.0%
6.5%
6.0%
5.5%
5.0%
4.5%200920082007200620052004 2010 2011 2012 2013
UK unemployment rate
Source: Thomson Datastream, 14.1.14
Past performance is not a guide to future returns.
Investors who wish to have some fixed income in their portfolios should look to strategic bond funds, which can move investments between different types of bond – government, corporate, high yield and inflation linked. There are a number of general global and strategic bond funds available on the The Select list which are listed below.
Select list funds Global AggregateM&G Global Macro Bond
newton Global Dynamic Bond
threadneedle Global Bond
Strategic BondHenderson Preference and Bond
Legal & General Dynamic Bond trust
M&G optimal Income
UK AggregateFidelity strategic Bond
Henderson sterling Bond
Important information: For funds that invest in bonds, please be aware that the price of bonds is influenced by movements in interest rates, changes in the credit rating of bond issuers, and other factors such as inflation and market dynamics. In general, as interest rates rise the price of a bond will fall. The risk of default is based on the issuer's ability to make interest payments and to repay the loan at maturity. Default risk may therefore vary between different government issuers as well as between different corporate issuers. The investment policy of Fidelity Strategic Bond Fund means it can be more than 35% invested in government and public securities. These can be issued of guaranteed by other countries and governments. For a full list please refer to the fund's prospectus.
6
Property
Within commercial property, we see a marked difference in the value offered by prime real estate and properties in less fashionable locations. In a generally risk-averse environment, investors have preferred to shelter in perceived safe havens and this has resulted in yields falling (and so prices rising) for prime properties and higher yields (and so lower prices) for secondary sites. During the second half of 2013, the yields on secondary property began to fall back a little but we believe this process has some way to run.
Secondary property yields have a long way to fall
Sep-9
9
Sep-0
0
Sep-0
1
Sep-0
2
Sep-0
3
Sep-0
4
Sep-0
5
Sep-0
6
Sep-0
7
Sep-0
8
Sep-0
9
Sep-1
0
Sep-1
1
Sep-1
2
Sep-1
3
% s
pre
ad o
ver
UK
10 y
ear
Gilt
s
10
8
6
4
2
0
-2
UK Corporate Bonds
UK Secondary Property
UK Prime Property
Source: Fidelity, CBRe, 29.11.13
Past performance is not a guide to future returns.
Within the residential market, there is increasing talk of a bubble forming. Outside the most popular areas of central london this probably overstates the position, with prices in many cases still no higher than at the previous peak before the financial crisis. With government policy likely to remain supportive ahead of an election in 2015, house prices will remain well underpinned over the next year.
Residential property only back to 2007 level
200920082007200620052004
190
180
170
160
150
140
1302010 2011 2012 2013
UK House Price Index
Source: OnS, Thomson Datastream, 14.1.14
Past performance is not a guide to future returns.
Select list funds Property ‑ ListedAberdeen Property share
Fidelity Global Property
M&G Global Real estate securities
Property ‑ PhysicalHsBC open Global Property
Ignis uK Property
Commodities
While it is unwise to generalise about an asset class which includes such diverse investments as energy and both precious and industrial metals, we believe commodities as a whole remain unattractive. A rising dollar, which looks likely in 2014, is generally bad for assets priced in the uS currency; demand from China, an important factor, looks likely to moderate as the Chinese economy rebalances away from investment and exports towards domestic consumption; and there remains an overhang of excessive investment in new capacity by the mining majors which new management in all the largest companies is only beginning to unwind. Gold has proved that it cannot be relied on as a safe haven. With no income to underpin its value, gold is best left to specialists.
Select list funds Commodities ‑ GeneralFirst state Global Resources
Martin Currie Global Resources
Commodities ‑ Precious MetalsBlackRock Gold and General
Investec Global Gold
Important information: Some funds in the property sector invest in property and land. These can be difficult to sell so you may not be able to cash in this investment when you want to. There may be long delays in acting on your instructions to sell your investment. The value of property is generally a matter of a valuer's opinion rather than fact. When investing in overseas markets, changes in currency rates may affect the value of your investment.
7
equities – a regional perspective
us
We remain positive on the outlook for uS shares, despite a 30% rise in the value of the S&P 500 during 2013. Arguably the uS economy is in a healthier position than for many years.
US share valuations below peak levels
84 86 88 90 92 94 96 98 00 02 04 06 08 10 12
35
30
25
20
15
10
5
US Price/Earnings
Pric
e/Ea
rnin
gs
Ratio
Source: Thomson Datastream, 14.1.14
Past performance is not a guide to future returns. When investing in overseas markets, changes in currency exchange rates may affect the value of an investment.
The gap between tax revenues and government spending (the budget deficit) and between imports and exports (the trade deficit) has diminished rapidly. This is a positive for the uS dollar, which in turn makes uS assets more attractive as a store of value for investors. One of the reasons for the improving economic position is the positive influence of the energy revolution driven by the discovery and exploitation of Shale oil and gas. This is a key driver of the uS’s improving trade balance
and a source of increased competitiveness for American industry. Other clear positives include an improving housing market and rising employment levels. While uS shares are quite highly valued compared to other major markets, momentum is behind the market.
Shares do not usually rise to fair value and then stop. Historically they have tended to carry on until they are obviously overvalued and we remain some way off that position today.
Select list funds North AmericaAXA Framlington American Growth
Fidelity Funds America
HsBC American Index
JPM us select
old Mutual north American equity
schroder qeP us Core
North America Small/Mid CapBlackRock us opportunities
JPM us smaller Companies
8
JAPAn
We are positive about the outlook for Japan in 2014. Japan has long been a frustrating market for investors – almost the definition of a false dawn. However, that changed with the election in late 2012 of Prime minister Shinzo Abe, who promised to restore Japan’s fortunes through a combination of monetary and fiscal easing and structural reforms – known collectively as his “three arrows”. The first two of these have already started to exert a positive influence on the Japanese economy and they were largely responsible for the strong rally in the nikkei index in the first half of 2013. The pause for breath in the second half of the year reflected concern that the third arrow – structural reforms such as reducing import tariffs and increasing female participation in the workforce – would prove to be tougher nuts to crack. However, rising business confidence, increasing property prices and higher wages are signs that the long fight against deflation may be winnable. Investors including the Government’s own pension fund are starting to encourage companies to focus on improving shareholder returns. A weakening yen is supporting Japan’s big exporters and looks likely to continue doing so this year.
The importance of the exchange rate to the Japanese market125
120
115
110
105
100
95
90
85
80
75
2000
1800
1600
1400
1200
1000
800
600
Japanese Yen to US$
TOPIX – Price Index (right hand scale)
200920082007200620052004 2010 2011 2012 2013
Source: Thomson Datastream, 14.1.14
Past performance is not a guide to future returns. When investing in overseas markets, changes in currency exchange rates may affect the value of an investment.
Performance over five years2009 2010 2011 2012 2013
TOPIX Index -6.7% 19.5% -11.8% 2.8% 24.6%
Source: Thomson Datastream, 31.12.08 to 31.12.13, with income reinvested in £ terms
Although there remain some residual concerns about the impact of the forthcoming hike in Japan’s sales tax in April, we remain confident that the Government will do what is necessary to return the country to growth. With so many international investors on the side-lines, the potential exists for a rise in Japanese share prices to become self-fulfilling.
Select list funds JapanAberdeen Japan Growth
Baillie Gifford Japanese
HsBC Japan Index
Jupiter Japan Income
old Mutual Japanese select
schroder tokyo
Asia‑Pacific incl JapanAberdeen Asia Pacific and Japan
Fidelity Funds Pacific
smith & Williamson Far eastern Growth trust
9
uK
We like the uk but not as much as the uS or Japan. The outlook for the uk stock market is confused by the fact that it is a notoriously poor reflection of the state of the uk economy. Were it more closely linked to the health of uk plc then the outlook for uk shares would be unequivocally good.
The British economy has surprised most observers on the upside over the past year and yet the outlook for interest rates remains benign – a powerful combination. That “Goldilocks” scenario looks likely to persist, with inflation in check and economic growth expected to match that in the uS and outpace the rest of europe by a healthy margin. The extent to which this will be reflected in the stock market is limited by the relatively high overseas exposure of uk-listed companies.
The prices of the biggest companies are governed as much by global growth prospects as the uk outlook. Also, for the more domestically-focused mid- and small-cap companies the good news is already fairly well reflected in valuations – the FTSe 250 has outperformed the FTSe 100 by a large margin in recent years.
UK mid‑caps have outperformed the blue‑chips
280
260
240
220
200
180
160
140
120
100
80
60
FTSE 100 – Price IndexFTSE 250 – Price Index
200920082007200620052004 2010 2011 2012 2013
Source: Thomson Datastream, 14.1.14
Past performance is not a guide to future returns.
Performance over five years2009 2010 2011 2012 2013
FTSe 100 27.3% 12.6% -2.2% 10.0% 18.7%
FTSe 250 50.6% 27.4% -10.1% 26.1% 32.3%
Source: Thomson Datastream, 31.12.08 to 31.12.13 with income reinvested
A further drag on uk earnings could be caused by any appreciation of the pound against the euro, which seems possible given the likely easier monetary policy in the eurozone over the medium term. Investment in the uk should focus on larger companies. Their valuations have some catching up to do and blue-chip shares are well supported by attractive dividend yields in many cases.
Select list funds UK Equity AXA Framlington uK select opportunities
ecclesiastical Amity uK
Fidelity uK select
HsBC uK Ftse 100
HsBC Ftse All-share
Jupiter uK special situations
Kames ethical equity
Liontrust uK Growth
UK Equity IncomeArtemis Income
Fidelity MoneyBuilder Dividend
Henderson uK equity Income
JoHCM uK equity Income
Liontrust Macro equity Income
UK Small/Mid‑cap Equity HsBC Ftse 250
Marlborough special situations
old Mutual smaller Companies
Royal London uK Mid-Cap Growth
threadneedle uK Mid 250
10
euRoPe
Shares in europe enjoyed a strong year without the obvious positive economic drivers seen in the uS and Japan. The rally was not driven by better earnings so much as relief that the worst of the eurozone crisis appeared to be in the past and the anticipation of improved economic conditions to come. The long-term outlook for europe remains difficult, however, as the slow drift towards greater political and economic integration continues. moreover, because profits in the region held up pretty well during the financial and sovereign debt crisis (thanks to a high proportion of sales outside europe and effective cost-cutting) there is arguably less scope for earnings to rise sharply from here.
Poor demographics and, potentially, a resurgent competitive threat from Japan and the uS (thanks to Shale) are further elements in the negative case against europe. So, too, are signs of a slowdown in demand in some key emerging markets. It is foolish to generalise about such a diverse group of countries and there are clearly pockets of value and very many world-class companies for stock-pickers to focus on. However, the region as a whole does not look particularly compelling after last year’s gains.
Select list funds Europe (excl UK)BlackRock Continental european
Henderson european special situation
HsBC european Index
Jupiter european special situations
schroder european Alpha Plus
threadneedle european select
Single Country EuropeBaring German Growth
Fidelity Funds Germany
Fidelity Funds Italy
CHInA
China has been a powerful reminder over the past few years that economic growth and stock market performance are not necessarily closely correlated. The Shanghai market has underperformed sharply even as growth has continued to outstrip that in the world’s other large economies. China has fallen out of favour with investors, both at home and internationally, and its shares now trade well below their long-term average valuation. There remain plenty of things to worry about in China, but many of these, such as the prospect of a Western-style banking crisis are almost certainly overdone.
The new leadership in Beijing has put in place a number of reforms which point China in the right direction on a number of social, economic and financial fronts. In the longer-term it is engaged in an important rebalancing of its economy away from exports and investment towards domestic consumption which will improve the quality and sustainability of its growth.
Taking a longer-term view, it is hard not to argue for a reasonable exposure to the world’s fastest-growing major economy, a country with a powerful entrepreneurial spirit and a determined Government. The current historically low valuations make this a good contrarian moment to invest in China.
Important information: When investing in overseas markets, changes in currency exchange rates may affect the value of an investment. Investing in small and emerging markets can be more volatile than those in other overseas markets.
China’s valuation advantage18
16
14
12
10
8
6
4
2
0
China
Pric
e/Ea
rnin
gs
Ratio
Korea Japan US UK
Source: macquarie, Fidelity, December 2013
Select list funds Emerging Markets Regional Equity (China)Fidelity Funds Greater China
schroder IsF Greater China
11
AsIA eX-CHInA, eX-JAPAn
If it is difficult to sensibly generalise about europe, it is even more so in Asia. At the moment there appears to be a divide between northern Asia, where the outlook looks better than valuations would suggest and the ASeAn countries in the south of the region where more is already priced in and the outlook is clouded by the likely continued tapering of monetary stimulus by the Federal Reserve. South korean shares have been undermined by the posturing of its neighbour in the north and the perceived threat of a weaker yen in Japan.
The country is home to some of the world’s best brands in electronics and the automotive sector and it stands to be a big beneficiary of recovery in the West. Despite this valuations are low. Taiwan, technological workshop of the world, is also well placed for a period of innovation and growth in developed markets. In the south of the region, the ASeAn growth story is real but it is well known, in particular to foreign investors. In addition to higher valuations, the Fed’s taper means that money will increasingly look to return to the uS from Asia, which could expose those countries most in need of foreign liquidity. A good long term story, but 2014 might not be the best year to be invested in the region.
Select list funds Asia‑Pacific ex‑JapanAberdeen Asia Pacific
Fidelity south east Asia
First state Asia Pacific Leaders
HsBC Pacific Index
M&G Asian
newton Asian Income
schroder Asian Alpha Plus
otHeR eMeRGInG MARKets
emerging markets fell out of favour in the second half of 2013 after it became clear that the uS was considering a reduction in its programme of monetary stimulus via quantitative easing. Investors worried in particular about those countries that were most dependent on external investors to fund their economies and those which had raised debts in foreign currencies. With the uS “taper” now underway, those fears are likely to persist through 2014, providing a headwind for emerging market equities and currencies.
Weaker currencies are not necessarily a bad thing, if they increase the competitiveness of a country’s exports. But not all emerging markets will benefit from this, especially those dependent on selling commodities, and weaker currencies will reduce the ability of consumers to buy imported goods. There remain good opportunities for stock-picking in emerging markets, with strong growth in particular areas and industry winners that are able to capitalise on that growth. Overall, however, 2014 is likely to be another challenging year for many emerging markets.
Select list funds Emerging MarketsBlackRock emerging Markets equity tracker
Fidelity Funds emerging Markets
JPM emerging Markets
Lazard emerging Markets
threadneedle Global emerging Markets
Emerging Markets Regional Equity (excl China)Fidelity Funds Latin America
Franklin India
schroder IsF BRIC
threadneedle Latin America
12
Bonds – in focus
The dog that didn’t bark in 2013 was the widely expected Great Rotation from bonds to equities. Bond prices held up better than pessimists predicted and they could continue to do so in 2014. What is extremely unlikely, however, is that the capital value of most bonds will rise this year so the risks for investors are unbalanced – the upside is probably limited to a return driven almost wholly by income while the downside could include price falls if there is a rapid withdrawal of money from the asset class. We prefer strategic bond funds, which are best placed to protect investors from losses and to secure the best returns from the higher-yielding parts of the fixed income universe.
GoveRnMent BonDs
Highly-rated Government bonds had a difficult 2013, with yields rising after the Federal Reserve hinted that monetary stimulus would start to be unwound.
Government bonds have already corrected6.0%
5.5%
5.0%
4.0%
3.0%
2.0%
1.0%
4.5%
3.5%
2.5%
1.5%
200920082007200620052004 2010 2011 2012 2013
UK Government Bond Yield
Source: Thomson Datastream, 14.1.14
Past performance is not a guide to future returns.
They may rise a bit further, but in the absence of either much stronger growth or inflation there is no reason to believe that they will increase sharply in 2014. Governments look unwilling to tolerate a material rise in yields, and interest rates will therefore stay low, so this year should see Government bonds tread water.
Select list funds UK Government BondAllianz Gilt yield
Henderson Institutional uK Gilt
HsBC uK Gilt Index
Royal London uK Government
HIGH yIeLD BonDs
This looks the most interesting part of the fixed income universe due to the higher yields available from the slightly less blue-chip companies issuing these bonds and the support provided by a healthier economic backdrop. Income seekers will continue to chase yield in 2014, offsetting any upward pressure on yields that might be passed on from higher Government bond yields.
Select list funds European High YieldFidelity Funds european High yield
Invesco Perpetual european High yield
M&G european High yield
Global High YieldBaring High yield
Investec Monthly High Income
JPM Global High yield
InFLAtIon-LInKeD BonDs
The longer that quantitative easing continues, the greater the risk of a policy error leading to resurgent inflation. This is not an issue at the moment, and may well not be during the whole of 2014. However, as the tail-risk of a price spiral increases, inflation-linkers look more interesting.
Select list funds Global Inflation‑LinkedFidelity Global Inflation-Linked Bond
standard Life Global Index Linked Bond
UK Inflation‑LinkedHenderson Index-Linked Bond
Legal & General All stocks Index Linked Gilt Index
M&G Index-Linked Bond
13
InvestMent GRADe BonDs
The gap between Government bond yields and those offered by higher-quality corporate bonds provides enough compensation for the extra default risk taken by investors.
The narrowing gap between corporate and government bond yields
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
High Yield Bonds
Investment Grade Bonds
2009 2010 2011 2012 2013
Source: Thomson Datastream, 14.1.14
Past performance is not a guide to future returns.
However, the expectation of further falls in yields (and so rises in corporate bond prices) looks unrealistic. This means income will be the major contributor to total returns and investors will rightly question whether they cannot achieve a similar yield from higher-yielding equities which also offer the prospect of dividend increases over time.
Select list funds European Corporate BondFidelity Funds euro Corporate Bond
M&G european Corporate Bond
UK Corporate BondBaillie Gifford Corporate Bond
BlackRock Corporate Bond tracker
Henderson strategic Bond
M&G strategic Corporate Bond
14
Investment risks in 2014
With growth underway, valuations reasonable, sentiment cautious, policy supportive and inflation under control, the investment outlook is positive. The principal risk in such a benign scenario is for markets to be unsettled by an unexpected geo-political event. Obvious candidates include an escalation of tension between Japan and China, excessive posturing by north korea or a flashpoint in the middle east.
The financial risks look less likely: perhaps an escalation of the eurozone crisis from an unexpected quarter such as France. Interest rates could begin to rise more quickly than anticipated in either the uk or uS. The proposed sales tax hike in Japan could disrupt retail sales as an earlier tightening did in 1997. Inflation could accelerate.
none of these seems particularly likely at this stage but that is the nature of tail risks. They come out of nowhere.
In fact, I think the greatest risk to my outlook is the most mundane of all – that investors simply decide that company profits are not rising quickly enough to justify today’s higher valuations.
Select list funds Select List funds not mentioned in this quarter’s Investment Outlook
Global Real Assets Fidelity Funds Global Real Asset securities
First state Global Listed Infrastructure
sarasin Agrisar
Emerging Markets Local Currency BondsInvestec emerging Markets Local Currency Debt
Pictet emerging Local Currency Debt
templeton emerging Markets Bond
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