Expect modest gains for equity markets and higher bond yields in 2014 as the world’s major economies continue to grow, suggests a report from Russell Investments.
It notes politicians and policy remain the biggest threats to economic recovery, and suggests U.S. monetary policy and political pressures worldwide could impact the 2014 performance of various asset classes.
“As we look toward 2014 we’re forecasting synchronized growth across the U.S., Japan and Europe for the first time since 2010,” says Andrew Pease, global head of investment strategy at Russell. “We also see a strengthening low-inflation recovery that favors equities over bonds, despite relatively full equity market valuations.”
Quantitative Easing (QE) has had little influence on the portfolio weighting guidance suggested by Russell’s investment strategists. When QE eventually winds down, they expect it to trigger some market volatility; however, they do not believe the U.S. Federal Reserve has significantly distorted asset prices.
In fact, they see little evidence that QE has pushed asset prices beyond levels that can be justified by the current combination of stable economic growth, low inflation and moderate corporate earnings growth.
Read: Retail sales key to U.S. growth
Canadian equities, which rallied strongly in the third quarter as gold and oil prices rose on geopolitical tensions, are expected to pull back slightly over the remainder of the year. Shailesh Kshatriya, associate director of client investment strategies at Russell Investments Canada, notes that Canadian equities are currently trading at a higher price-to-earnings ratio than U.S. or emerging markets equities.
“We deem the premium multiple as unwarranted,” Kshatriya says. Although crude oil prices have moved higher, there is still significant volatility in the spread between Western Canada Select (WCS) versus its American counterpart West Texas Intermediate (WTI), which he expects to continue until there is expanded pipeline capacity.
This includes “improving capacity within Canada’s borders (i.e., west-east pipeline), extending capacity to the U.S., as well as shipments offshore. The increased news flow regarding all three options has been encouraging; however, concrete developments leading to actual “ground breaking has yet to materialize in a meaningful way,” he noted.
Russell’s strategists also offer a look at key global asset class pairings to determine which asset class in each pair currently signals better return prospects. Their model currently signals a preference towards international equities relative to Canadian equities, and towards Canadian equities relative to fixed income.