Modest growth expected from commodities, says F&C’s Niven

Favour high yield over government bonds as they remain under pressure, warns Paul Niven, head of Multi-Asset Investment at F&C Investments.

Global economic outlook brighter than at any point since the onset of the financial crisis
We begin 2014 with an expectation of fundamental improvement across the major global economies. Indeed, the outlook for the global economy appears brighter than at any point since the onset of the financial crisis. With market commentators having recognised the improving traction in the global economy and apparent reduction in macro risks we have increased our equity exposure to a slight overweight on our model portfolio.

Our constructive outlook is based on evidence that the global upswing is progressing at a time of subdued inflation and when policymakers are expected to keep monetary policy accommodative. Purchasing managers indices are signalling healthy expansion in the US and UK and recovering growth in Europe and China. With non-manufacturing sectors also improving and positive earnings surprises increasing, GDP forecasts are still being revised upwards.

Uncertainty over global monetary policy
While monetary policy is loose, the improvement in growth has created some uncertainty over US and global monetary policy. A moderation in quantitative easing (QE) is to be expected but, as the taps are progressively turned off we would do well to remember that this is a reduction in the provision of liquidity rather than an actual tightening of policy. The Federal Reserve and other central banks have signalled a continuation of low rates and will therefore be mindful of upsetting borrowing costs and disrupting the ongoing recovery. It has been reassuring to hear how the US Federal Reserve accompanied its QE tapering announcement with dovish rhetoric on the path of monetary policy.

The essence of the message was that the start of QE tapering does not necessarily equate to a rise in interest rates. However, at this point we still have little clarity on the trajectory of tapering and if economic data continues to strengthen, there remains a risk that a more vigorous response by central banks will dent risk appetite. With stocks in some markets already trading on relatively rich valuations, this does represent a threat.”

Government bonds remain under pressure; high yield is preferred
After a poor year in 2013, government bond markets are likely to remain under pressure. For US Treasuries, the tapering of QE will erode overall demand at a time when the economy is expanding at a reasonable pace. Ten-year benchmark yields could rise further, through to perhaps 3.5% if growth momentum improves further. Better value continues to be found in eurozone periphery bonds, although sentiment may currently be a little too buoyant following some encouraging economic data. Of the non-government asset classes, high yield is our preferred area.

Modest progress expected for commodities
The brighter outlook for global growth may not translate into improved performance from commodities. Many raw materials still bear the legacy of the price bubble of recent years and the expectation that supply will continue to outstrip demand, together with uncertainty about US monetary policy, should translate into only modest progress in 2014.

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