All set for a global recovery.
Modest global growth expected as the world economy saddles up for a recovery, astute investors will think laterally about portfolio construction.
Global G3 economies are heading towards synchronised, moderate growth in 2014 with a likelihood of low returns, according to the Annual Global Outlook report, released by Russell Investments.
The report is produced by Russell’s global team of investment strategists, who offer their investment insights and economic forecast for the coming 12 months, as well as in-depth analysis of key fiscal components within the global market.
According to the 2014 report, the low return environment will be representative of narrowed credit spreads, equity markets that trade at full valuation, and global bond yields with room to rise.
Australia along for the ride
Russell’s Senior Investment Strategist for Asia Pacific, Graham Harman, said markets were priced well over the past 12 months, which is set to result in moderate single digit returns for 2014.
“While we may be headed towards a low return world, this is not a set and forget year. In this climate, active asset allocation becomes more important as astute investors need to think laterally about portfolio construction,” he said.
Over the coming year, equities are expected to outperform fixed interest and cash, with key drivers being the continued global recovery, a benign inflationary backdrop, investor preference for equities and corporate regearing.
As the investment landscape continues to evolve, Russell identified some key themes for the Australian market in 2014:
- The ‘Great Rotation’ has some way to run, as investors will continue to move out of bond and income funds, and into equities – this is spurred by relative returns and by the low-inflation, growth recovery backdrop
- Emerging markets are expected to perform better in 2014, with China and Japan acting as engines for growth in the Asia Pacific region
- Cash and bonds will both play a key role in portfolio management during this time of lower returns and heightened volatility, as downside risks for bonds appear limited and cash gives investors the chance to buy opportunistically on market dips
- The weakening Australian dollar provides support for the domestic economy. With the AUD still overvalued by 20 – 30 per cent, unhedged international exposures will deliver capital stability and return consistency.
Lower returns no cause for concern
Russell believes the prospect of lower returns does not equate to market pessimism as active management can still produce strong returns for investors.
“There is a challenge now when it comes to achieving a rate of return at a level of risk investors can survive – there are still opportunities for good returns if investors use the full arsenal of a multi-asset investment strategy, including a sharpened focus on managing downside risk and an actively managed and globally diversified multi-asset portfolio,” Mr Harman said.
For more information, please see the 2014 Annual Global Outlook.