As the global recovery gathers pace, ABN AMRO Private Banking expects equities to outperform bonds, but after two years of strong returns, the firm says the maturing bull market demands careful selection.

As the global recovery gathers pace, ABN AMRO Private Banking expects equities to outperform bonds, but after two years of strong returns, the Netherlands-based private bank warns that the maturing bull market demands careful selection as geopolitical tensions and emerging market volatility increases.

In its latest investment outlook paper, Time For Selection, ABN AMRO Private Banking maintains its overweight position for European equities and underweight stance for the US from the previous quarter, seeing valuations in both regions supported by a continued economic recovery in developed countries and global growth of 3.7 per cent. US economic data is predicted to bounce back after recent weakness, with rates forecast to rise to 1.5 per cent by the end of 2015, the firm said.

“The bullish trend in equities is not over. Challenges, includ­ing adverse weather, geopolitical tensions and emerging-market volatility, are abating. Developed equity markets and corporate bonds have already significantly benefited from central bank largesse. The recoveries in the US, Europe and Japan have also been effectively discounted. It is therefore time to employ the art of selection to find the best investment opportunities,” the bank said.

The private bank is cautiously optimistic about the global economic recovery and believes that the eurozone and Japan will synchronise with the US economic cycle, lifting world trade and resulting in 3.7 per cent world growth in 2014.

It recommends investors concentrate active equity strategies in Europe, Japan and selected emerging-markets countries and highlighted the potential earnings in the information technology, materials and health care sectors.

“Given the complexity of the recovery, we recommend careful selection of stocks with superior earnings potential in the information technology, materials and health care sectors, as well as investments to take advantage of the growing middle class in emerging markets and the use of robotics and automation in manufacturing,” said Didier Duret, chief investment officer at ABN AMRO Private Banking.

“We recommend bonds in the European periphery and high-yield bonds with decent yield differentials that can absorb the shock of higher rates. We also suggest diffusing risk through selective exposure to listed real estate and the use of hedge fund strategies that can benefit from volatility,” Duret added.

Since spring 2013, concerns about the reduction of monetary stimulus in the US and higher yields in devel­oped economies have triggered portfolio reallocations, hurting emerging-markets assets. Specific issues in emerging markets have also driven volatility, such as concerns about financial stability in China, political turmoil in Turkey, Thailand and Ukraine and external vulnerabili­ties.

ABN AMRO said it believes current fears regarding emerging markets are "overdone" and expects them to stabilise in 2014.

“We expect higher growth in emerging markets in 2014 (4.8 per cent) compared to 2013 (4.3 per cent). This assumes that stronger exports to developed economies (supported by currency depreciation) outweigh the negative effects from tighter financial conditions. We do not expect a large-scale crisis, because emerging-markets fundamentals have improved, exchange rates are more flexible and foreign-exchange reserves are higher when compared with previous crises,” the firm said.