In-house investment specialists outline the key investment themes for 2014 

 

Jersey – Coutts hosted a client investment dinner at Longueville Manor in Jersey. The discussion centred on Coutts’ 2014 investment outlook: Today and Tomorrow, highlighting Coutts’ view of the strategies investors should consider today to build a portfolio for tomorrow.

Alan Higgins, Chief Investment Officer, UK and Richard Tribe, Director, Coutts Channel Islands discussed their latest insights following which they took Q&As from guests.

Alan Higgins comments, “Market performance in the early part of this year has presented some challenges to our 2014 Outlook. But equities remain our first choice, and we continue to see limited upside for bonds.

It’s been five years since rates were cut to record lows in response to the global financial crisis and the great experiment in quantitative easing (bond purchases or QE) was undertaken across developed markets. Today, QE has only begun to be unwound and rates look set to stay where they are until at least 2015. The clear winners from this unprecedented stimulus have been equities and other so-called risk assets such as corporate and high-yield bonds. 

Looking ahead to the next five years, investors will need to anticipate the winding down of the extraordinary QE experiment. That’s likely to mean rising volatility across global markets and asset classes. 

Bond investors will need to keep a closer eye on credit quality to protect their capital. Equities should benefit over time as QE is withdrawn, as this will be predicated on a strengthening global recovery, so we see equities continuing to outperform bonds in the years to come.

Richard Tribe added, “We have a strong team in Jersey and it was great to see our clients so engaged. We were delighted to welcome Alan Higgins back to Jersey to give them access to the intellectual insights of our Chief Investment Officer. I am in no doubt that Alan was able to instil our clients with renewed confidence and spark some consideration to the opportunities for long term investors.”

The key investment themes are:

  • Keeping it safe – low bond yields have been causing investors anxiety for years, but there are ways to enhance yields without taking too much risk. European and UK investment-grade bonds can offer protection against interest-rate uncertainty at a reasonable price.  Some emerging-market corporate bonds in Asia may play an important role in portfolios for investors willing to accept the greater risks inherent in this asset class.
  • Stocking up on income – dividend growth pays when real interest rates are negative, but don’t just focus on those that yield most. The income play has been popular for some years, so selection is important. We would look for sectors that offer net dividend yields that are historically above average, and with room for dividend growth.
  • Quest for growth – investors need to drill down deeper to unearth growth potential. We still prefer equities over bonds as we enter 2014. Emerging markets continue to have long-term growth potential. In terms of equities, shares in the luxury goods sector trade at a discount to many world equities. Technology companies offer growth potential although you may want to look beyond the sector’s giants for the best opportunities.
  • Changing risks – political instability remains a threat to Europe’s fledgling recovery. Japan’s politicians are playing with high stakes. Low nominal growth rates in developed nations mean tax hikes are a real possibility.    
  • Who dares wins – low interest rates mean that investors need to step up the risk ladder in order to achieve returns. High-yield bonds are now closely correlated to equities. Consider absolute-return funds to diversify portfolios. Cash deposits will continue to lose money in real terms (i.e. after inflation) for savers.