Julius Baer’s researchers provide prospects for 2014

Five experts from Julius Baer private bank give their views on the prospects for: global equity performance; yield convergence in Europe; emerging market corporate bonds and the recovery of gold in 2014.

Christian Gattiker, head Research and chief strategist on the prospects for a range of asset classes in 2014:

“The new year gets investors back to square one. Some are embracing this situation, while others are yearning for the returns of the year that just passed. But we all have to come up with a stance for the year ahead. We reiterate our positive view on equities versus bonds and commodities for now. The trend in January will be the proof of the pudding whether the trends of last year will be shaping global financial markets in 2014 as well. When asked about the biggest single risk currently, we think that it is the largest financial market in the world, i.e. the US bond markets, getting out of control. Remember the rate shocks back in 1994 or earlier in the 1970s.”

Christoph Riniker, head Equity Research, on the equity performance 2013:

“In 2013 global developed markets returned circa 27% in USD terms, which was largely driven by P/E expansion. Emerging markets ended the year in slightly negative territory despite stabilising performance in the second half of the year. Global sectors showed a mixed picture without a clear divide between cyclicals and defensives.”

Markus Allenspach, head Fixed Income Research, on yield convergence in Europe:

“The 10-year government bond yields of Spain and Italy at long last dipped below 4% again while the German government bond yields of the equivalent maturity trends towards 2%. As a result, the spread of Spanish and Italian bonds above Germany has fallen to the lowest level since 2011. The improvement of the Spanish bond market reflects the better economic outlook in the euro area’s fourth-largest economy. For 2014, we are maintaining our call for more yield convergence in the euro area as German inflation is accelerating and the economic situation in the European periphery improves. We are also maintaining our call for European peripheral debt as the default rate will decline and liquidity provisions are set to improve.”

Emiliano Surballe, Fixed Income analyst, on emerging market corporate bonds:

“Despite all the worries surrounding emerging markets’ investments, bond spreads of emerging market (EM) corporates bonds seem to tell a different story. Currently at 310 bps, corporate spreads of EM hard-currency bonds are merely 20bps from the lows seen in early 2013, when demand for EM corporates was at its peak. Nevertheless, on an absolute basis, EM corporate bonds yields are substantially higher since US Treasury yields have gone up by more than 1.1% since January 2013. Overall, EM corporates have performed well (approx. 4%) since September. At the moment, many issuers are trading at spreads similar to those at the beginning of 2013. Still, selected issuers in the low investment-grade area offer attractive absolute yields.”

Carsten Menke, Commodity analyst, on the recent recovery of gold:

“Most commodity markets remain under pressure early in the new year, but precious metals are off to a good start. Gold is back above USD 1,200 per ounce despite mostly negative fundamental news flow. We assess gold’s current recovery as temporary. Fading Chinese investment demand is a new bearish theme to watch while higher interest rates, a lack of inflation pressure and reduced tail risks continue to weigh on Western world investors’ willingness to pay for gold as insurance. We reiterate our bullish view on platinum and palladium against the backdrop of constrained global mine supply and bright demand prospects from automotive catalysts.”

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