Escape velocity is the speed necessary to move away from a gravitational force without propulsion. In economic terms, this occurs when economies achieve at or above trend growth for successive quarters, without – or with less – government support. We believe that this is happening in the developed world, led by the United States, and perhaps the UK, and are positioning client portfolios to benefit, says Close Brothers Asset Management
In 2013, markets were driven by high levels of central bank support – the propulsion – which resulted in signs of a global synchronised recovery across the developed economies. If we add China, 2013 will be the year in which 60 per cent of the world’s GDP showed an improving trend in economic indicators. Excessive liquidity, combined with renewed optimism for growth, was the tonic needed to power a double-digit equity market rally across the developed world.
However, revenues and earnings at the company level were still relatively lacklustre. This means that most of the move in markets in 2013 can be attributable to multiple expansion – that is markets got more expensive. This is not sustainable.
In 2014, this improved macro environment needs to create self-reinforcing consumer and corporate demand, and thus generate a material uplift in corporate revenues and earnings growth. Identifying securities that benefit from this improved macro demand will be a key driver of investment performance.
At Close Brothers Asset Management, we believe that 2014 will be another strong year for outperformance by developed market equities. We have positioned client portfolios with an overweighting to developed markets equities and underweighting to sovereign fixed income. Economic acceleration will lead to a reduction in central bank liquidity and a readjustment of the term structure of interest rates.
We are laser focused on finding the growth surprises of 2014
However, in our view strong disinflationary forces prevail and hence the interest rate adjustment may not be as painful as many fear. The transition to higher yields will nonetheless cause volatility across asset classes and, while corrections may be unnerving, we believe that equities in the developed world will continue to outperform bonds.
Within equities, we are laser focused on finding the growth surprises of 2014, identifying companies which can move higher based on top-line revenue and earnings growth. Many of these stocks also have a material dividend yield allowing us to use our equity exposures to generate both income and growth for clients. Alternative investments, such as liquid yield-generating property and infrastructure securities, will also be used to generate income for lower-risk portfolios.
Welcome back to good old-fashioned investing, where portfolio returns will be driven by selecting good companies in good sectors, which we believe can benefit from improving macro-economic demand, and can generate both capital growth and income for our clients.
For further information visit www.closebrothersam.com or call 020 7426 4076