Societe Generale Private Banking says developed markets remain the preferred place to be - with some caveats - in 2014, while only select emerging market opportunities look attractive. What a difference a few years makes.

When financial markets were tumbling in late 2008 and investors hunted for safety, emerging market countries were seen as the equivalent of the US Seventh Cavalry riding to the rescue. If an investor owned a company share or bond based from a developed economy such as Germany or the UK, the advice was to ensure that firm earned a large share of revenue from the emerging world.

How rapidly things change. At the annual investment outlook presentation held last week by Societe Generale Private Banking, now the recommendation is to only buy those emerging market firms where they are likely to earn money from developed market countries’ firms engaging in capital spending.

Figures don’t tell the whole story but can be useful. Last year, the MSCI World Index of developed countries’ shares posted total returns (capital plus reinvested dividends) of 26.7 per cent; the MSCI North America Index garnered a 30 per cent return, and the MSCI Europe Index made 25 per cent. By contrast, the MSCI BRIC Index fell 3.5 per cent; the MSCI EM Ex-Asia fell more than 9 per cent last year. (All figures are in dollars.) In other words, the young upstarts of the emerging world got a slap in the face, and after a tough period, the oldsters of the US, Europe and other select countries made up a lot of ground.

This turnaround has been explained in part by the fact that, last year, the effects of central bank quantitative easing from the US Federal Reserve and other banks have boosted stocks in countries such as the US, while the increasing likelihood that this QE process will decline, or be “tapered”, has hit emerging markets. There are other headwinds: China is going through a reform process to deal with perceived imbalances of growth, while the pace of reforms in countries such as India has been slow, feeding disappointment.

Likes the US

Societe Generale Private Banking’s global strategist, Xavier Denis, told journalists that week that in general terms, the French bank sees a strong reason to remain positive on markets such as the US; there are as yet few signs of inflation pressure in the US and companies’ profit margins are at historical highs. In the eurozone, the pattern is mixed: Germany is the strongest economy.

In summary, SocGen’s private bank is playing the shift in the relative fortunes of economies and markets in the following ways: It favours short-duration bonds and expects US bond yields to rise; it likes the look of European banks, taking the view that a lot of painful deleveraging has now taken place; it favours industrials and technology sectors in the US, Japan and eurozone; it favours certain select emerging markets (Poland, Philippines, Mexico, etc) and is bullish on German equities.

“Germany should benefit from the capex boom we see coming from the US and some other developed countries,” Denis said at the firm’s offices near Tower Hill in London last week.

“We see potential for capex-related stocks to perform well across 2014,” he continued.

“Japan was one of the biggest surprises in terms of the performance of equities,” he said. “I am not sure `Abenomics’ is going to succeed….otherwise the momentum on Japanese equities remains positive.” Denis said that he expects the BoJ and Japanese authorities to maintain an aggressive monetary easing stance; further Yen weakness is likely.

The bank does not expect the emerging market story to recover quickly; longer term, however, there is plenty of scope for growth, the firm added.