Partner Article

New year, same advice

Richard Clark and Simon Patterson of Barclays Wealth and Investment Management, look at the investment landscape for 2014.

It’s that time of year again. In reality, of course, the investment outlook – and the attention we pay to it – doesn’t suddenly change just because the calendar does. To the extent that we’re doing our job properly, most of the advice we offered at the end of 2013, on a tactical (3-6 month) and strategic view, ought to still be relevant now, and we hope it will be again in February, unless there is some dramatic news, and/or our worldview suddenly alters.

So, indeed, our investment views are little changed – and we’re pleased to be able to report that. They remain distinctive: we still think the global economy can muddle through the numerous risks it faces, and we focus firmly on the investment glass being half-full, not half-empty. So we think a carefully balanced portfolio containing a healthy weighting in risk assets can continue to perform solidly, and by more than enough to compensate for the risk of moving out of cash and getting invested.

Tactically, we would not be surprised by a modest setback in developed stock markets after the terrific run they’ve enjoyed in 2013, but we doubt it will be deep or long-lasting. Strategically, we continue to broadly favour corporate ahead of government securities and, as investors, we prefer to own companies rather than lend to them – financial personalities and circumstances permitting, of course.

Looking beyond the tactical horizon, stocks’ performance in 2014 will depend on context: if growth is driving monetary normalisation, as we expect, they can trade positively. The drivers of returns may shift, however. Valuations have risen markedly – but unsurprisingly – in the last two years, and are now slightly above their 10-year trend. They seem far from bubble territory, however, and earnings growth in the corporate sector may play a bigger role than in 2013.

From the standpoint of the UK economy, the resilience of the market and economic performance, together with some upturn in the outlook for the private sector, underpins our belief that UK growth can pick up. Key data have recently (and unusually) been far ahead of expectations, and we have long felt that fiscal austerity is not the constraint that many fear. On a full-year basis, the UK is, in our view, set to see one of the biggest accelerations of any major economy in 2014.

As with the US Federal Reserve, the Bank of England faces the challenge of how best to start normalising policy before latent inflation begins to materialise. What sort of return might we expect from developed equities? In a favourable cyclical context, the market can rise with earnings. Earnings growth, plus the dividend, may be a useful guide to the sort of return we might expect. Adding the dividend, a prospective return of 7-12% compares with the 5-year compound return of 8%. On a risk-adjusted basis, it exceeds what we expect in 2014 for most other assets.

This was posted in Bdaily's Members' News section by Barclays Bank PLC .