(February 18, 2014) —Remember the equity market rallies of 2013? Investors would be best served to keep them as memories, as 2014 has a very different time in store for non-profit investors, Russel Investments has warned.
Moderate economic growth and returns will require investors to be increasingly aware of upside and downside risks, all the while they should monitor rising volatility in 2014, the consultants said.
Winding down from one of the best years in a decade, the global equities market stands at a fork in the road—one towards a “speculative overdrive” or another towards a loss of much of its 2013 gains due to disappointing economic growth.
So early in the year it is difficult to foretell which is more likely, so investors should expect lower returns and higher volatility than last year.
“The uncomfortable reality is that global bond yields have further to rise, credit spreads have little room to narrow, and equity markets are trading at fairly full valuations along a variety of different metrics,” said Jeff Hussey, Russell’s global CIO.
A report from the firm said equity market returns were expected to be “mid-to-slightly-higher single-digit” in a rising rate environment and small cap equities’ outperformance would slow down. US large cap equities could anticipate a gain of 4% to 5% with a dividend yield near 1.7%.
Expected volatility and lower returns mean downside risk protection and active management may be good recommendations for the coming year.
Government bonds are also expected to produce moderate returns, due to the US Federal Reserve’s moves towards tapering in the first half of 2014.
“Continued accommodative monetary policy combined with low inflation will keep rates low,” Russell said. “That said, the onset of tapering in quantitative easing is likely to cause some volatility and could provide a tactical buying opportunity.”
However, with high quality sovereign bond returns predicted to remain in the low single digits, appetite for real assets is expected to increase “as bond investors seek other sources for yield.” Listed infrastructure and real estate, in particular, would benefit from economic growth while commodities are likely to be “held back” due to new supplies of energy and lower demand from China.
“The challenge for investors in the coming low return world is to achieve their required rate of return at a level of risk they can survive,” Hussey said. “The best way to do this, in our opinion, is through the use of actively managed, globally diversified multi-asset strategies. Set it and forget it won’t cut it anymore. In a low-return world, every basis point counts.”
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