• Australian large cap equities outperformed fixed income by 23% over the last 12 months
• Strategists see positive momentum in the Eurozone, Japan and emerging markets.

Sydney, 28 October, 2013 — Russell Investments is forecasting modest gains for equity markets and higher bond yields in 2014 following growth in major world economies, according to capital markets research released by the global asset manager.

The fourth quarter Strategist Outlook & Barometer report offers in-depth analysis of key economic and market indicators, with the insights helping to guide the firm’s multi-asset portfolios and services.

In the report, Russell cited politics – including uncertainty about U.S. monetary policy and political pressures globally – as the biggest threats to performance across asset classes in 2014.

Russell continues to favour equities over fixed income, with strategists remaining moderately positive on equity markets globally.

Domestically, Australian large cap equities have outperformed Australian fixed income by 23% (total return basis) over the past 12 months. According to Russell Investments’ Senior Investment Strategist for Asia-Pacific, Graham Harman, this pattern is expected to hold over the next 12 months, albeit at declining strength, as lackluster conditions and mixed economic signals affect Australian markets.

“We expect the low interest rates driving house prices to be balanced by a slowing domestic economy in the wake of a resource-sector boom,” he said.

The report also shows European equities are favoured over U.S. equities, while emerging market equities look increasingly more positive, possibly offering double-digit earnings growth in 2014.

Global Head of Investment Strategy at Russell Investments, Andrew Pease, said the forecast is for synchronised growth across the US, Japan and Europe for the first time since 2010.

“Looking ahead to 2014, we expect to see a strengthening low-inflation recovery that favours equities over bonds, despite relatively full equity market valuations,” he said.

Regional optimism in the Eurozone and Asia-Pacific despite political concerns

While Eurozone equities still appear relatively cheap and capital continues to flow amid the easy monetary policy of the European Central Bank (ECB), Russell’s strategists argue vigilance is still warranted. However, since the Eurozone’s key long-term problems have not been solved, these positives only marginally outweigh the negatives.

In the Asia-Pacific region, the investment climate continues to improve in Japan as Prime Minister, Shinzo Abe, appears successful in turning the economy around. Though stimulus and spending challenges remain, real GDP is at 4%, and monetary growth is at 3% year-on-year at the end of the third quarter, after bottoming near zero at the beginning of 2013.

Elsewhere, China’s economic rebalancing is performing as it should, and the Asia-Pacific region as a whole appears poised to respond positively to acceleration in the U.S. and/or European growth in 2014.

Asset class views

Russell’s global strategy team has a moderately positive view on global equity markets, while bond yields have fallen sharply in response to the Federal Reserve’s decision not to wind back their bond buying program earlier, a move that Russell believes may be an overreaction. Within regional equities, Russell prefers European and Japanese equities, followed by South-East Asia, the U.S. and Australia.

Mr Harman said emerging markets could get a renewed shakeout when talk of Federal Reserve tapering resumes, but believes most currency adjustment has already occurred across the vulnerable economies.

“Looking at the path ahead, we believe additional volatility may continue, but this could be leveraged as an opportunity to increase tactical equity positions, such as within multi-asset portfolios,” he said.

For more information, please see the “Strategists’ Outlook and Barometer” online.