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WEALTHMATTERS: Equities Offer Best Prospects In 2014, Says Conference Panel

Tom Burroughes

8 October 2013

This publication will issue a number of reports on the conference in the next few days. This is the first in the series.

While people disagree about the fine details, last week’s WealthMatters conference in London – attended by 250 people – was left in no doubt that investment experts predict equities as the most attractive asset class for 2014.

The conference, held at the America Square Conference Centre in the City, had a range of panel sessions covering topics ranging from asset allocation, a report on how to treat clients better; compliance worries; the meaning of “smart Beta”, and the use of exchange traded funds. The event was organised by ClearView Financial Media, publisher of this website. Sponsors for the conference were Equipos, brt, Ossiam, Advanced 365, SPDR, MSCI, Vermillion, Finantix, KA Watson, Wealthmonitor; with support from APCIMS (now renamed as the Wealth Management Association) and ETF Strategy.

In the panel entitled Are Equities The Way Forward For 2014? Panellists debated about developments such as the probable ending – or “tapering” of central bank monetary expansion (aka quantitative easing) as well as recent underperformance by once-hot emerging market stocks.

Bill O’ Neil, head of the chief investment office, UK, at UBS Wealth Management, said the risks of a global recession are now quite low. “Equities are an asset class that is beginning to emerge from what has been a fairly fallow period,” he said, talking about a “lost decade” for equities in which people have often instead focused on other areas such as corporate credits.

“We are probably now on the cusp of an earnings-driven phase after having moved through a period of strong monetary stimulus. We are unlikely to see any further QE moves from here,” he said, commenting on the issue of a reduction by the US Federal Reserve in its quantitative easing programme. “It is understandable that equity markets have reacted to that ,” he said.

“The key story is that central banks and policymakers are aiding and abetting asset price inflation with the aim of aiding de-lveraging.” This “inflation” is seen as the least painful way of dealing with the burden of debt, O’Neill said.

In future, the prospects of the stock market are increasingly going to be about earnings momentum, rather than the impact of the monetary stimulus; he said monetary policy is likely to be loose/neutral for the next two to three years.

“There is possibly some re-leveraging in the corporate sector,” he continued. On a regional basis, he likes the US - “The US stacks up really well,” he said. “Beyond the US the issue is one that Europe is improving but only at a speed that seems to be discounted already by the market.”

Japan has “very supportive” monetary policy, O’Neill noted, while he said that there are signs of stabilisation to emerging markets after what has been a torrid period as the reality of Fed tapering has arisen. “Many emerging markets do not have independence from the monetary cycle of the US and we have been reminded of that.”

“We are looking at mid-cap stories in a lot of countries, such as in the UK and US,” he said.

Higher rates

Dean Turner, who is a member of the investment strategy team at HSBC Private Bank, said the world economy is moving into a world of higher interest rates, which is a “challenging signal for sovereign bonds”.

Agreeing with the notion that equities are the most promising asset class for 2014, Turner said the economic momentum is in favour of developed rather than emerging markets at present.

On the US, he said: “If the US grows at about 2 to 2.5 per cent next year, then an 8 per cent earnings growth forecast is achievable. There is some upside for the US equity market.”

“We are quite optimistic about the outlook for European equities. What we don’t believe is factored in yet is earnings surprises on the upside in Europe,” he said. European equities are currently priced at around 12 times earnings (forecast), he said, so there is scope for re-rating eventually.

In Japan, the policy mix of the Abe government is favourable for corporate earnings, he said.

HSBC Private Bank likes hedge funds as a source for diversification, particularly as some of the traditional forms of portfolio insurance, such as bonds, have lost their value, he said.

Asked about whether there is a “wall of money” coming into equity markets and out of bonds or other sectors/geographies, he said the key impact of any switch out of bonds will be measured by the speed of any move of money. |If bonds sell off rapidly, this will be bad for equities. If rates rise as the economy improves, this will likely be supportive for stocks.

Barclays

Kevin Gardiner, who is managing director and chief investment officer, Europe, Barclays, said: “We do favour equities ourselves but not exclusively…“We recommend equities more than we would usually do.”

He put stress on the difference between some current economic and financial sentiment – which can be quite negative and volatile – and the longer term trend of improving living standards. “Let’s try to remember that growth is the norm but not the exception. “The West will get the fair share of the growth that’s out there.”

“The US consumer balance sheet is not fragile,” he said, arguing that some bank assets were written down so far in the aftermath of the 2008 crisis that they are likely to rise again. “We don’t expect any big government to default on its debt,” he said.

Toby Nangle, who is head of multi-asset at Threadneedle, agreed that equities are probably the best asset class to be in for next year. He argued since the middle of 2011, about 125 per cent of the total equity price return has come from the relative valuation effect. “We must recognise this recent period has been about valuation, not about a change in earnings expectations coming through,” he said.

In terms of alternatives to equities, there were few alternatives until recently, he said. With the back-up in bond yields that has happened this year, prospective returns from high-yield corporate bonds look more competitive, and inflation-linked government bonds can begin to offer some protection to portfolios. Furthermore, UK commercial property looks, for the first time for five years, to be interesting to us,” he said.

“We are still quite constructive to equities. We see a hand-over phase from the valuation-driven market to an earnings-driven market,” he said. Profits are currently high in the US as a percentage of GDP but, given mean-reversion, should decline over the medium-term, both as a result of the capitalist processes at work and under democratic pressures from politicians (as seen in the UK by attacks on energy firms’ profits), Nangle said.

“We are broadly supportive about equities but we won’t see the sort of straight line price path of the last two years,” he said, adding that expects bond yields to rise by 150 bps over the next two to three years. The issue for investors is the speed of the move.