2014 has brought lots of volatility with it.
U.S. stocks had a stellar run last year, but got off to a rocky start this year. Emerging market currencies and bonds have taken a hit.
In an environment where the Fed is tapering its asset purchase program, and investors are worried about rising interest rates in the U.S. and an economic slowdown in China, it can be hard to know what to do.
Credit Suisse’s Giles Keating, head of research private banking and wealth management, is out with his top seven investment ideas for 2014.
- Investing in Europe’s recovery – Europe is being helped by its central bank which maintains accommodative policy but also by improving fundamentals, like a bottoming out in house prices, improving current account deficits and labour costs. So, while the region is catching up with U.S., in terms of valuation in stock markets it lags behind those in the U.S. Keating recommends buying select stocks that will benefit from Europe’s recovery either directly or through an appropriate fund.
- Seeking equity with alpha – There is a lot more scope for stock selection. Keating recommends choosing a really good fund manager that “can take advantage of differential performance within the markets, and who can deliver potential for return over and above the overall index”.
- Emerging markets tapped into the global manufacturing cycle – The current rout in emerging markets reflects in parts, poor domestic policies, slowly tightening global liquidity, and a decline in commodity prices. Keating suggests that investors look to countries “keyed into the global manufacturing cycle like Taiwan” or markets where there are prospects for reform but which aren’t fully discounted in the market.
- Fixed income in a world of rising yields – In recent years, the strategy has been to take a bit of credit risk, but going forward the scope for good performance is much more limited, as spreads have come down and the overall level of yields is pretty low. “Choose really carefully, review your credit portfolios, take out the weaker credits, go for those even of slightly lower yield that are more soundly based, even Cocos [contingent convertibles],” Keating says.
- Thinking about Forex as the Fed tapers – As the Fed tapers investors are beginning to think about when they will move to tighten monetary policy by raising rates. This will be a bid to the dollar to drive it up. We’ve already seen this happen against emerging market currencies, though not so much against the euro or Swiss franc. Investors should watch for big structural opportunities that can come against the euro or Swiss franc and keep an eye on further opportunities in emerging markets.
- Looking at companies that are cash rich – Companies balance sheets are flush with cash and this creates the opportunity to go for special dividend or buyback, or for mergers and acquisitions. Either way investors should consider a “carefully chosen basket of stocks either recommended by research or put in place by a good manager.”
- Benefiting from accelerating reforms in China – Recent reforms are intended to redirect the economy away from exports and infrastructure investment to healthier consumer driven growth. Other reforms include reducing leverage and corruption, all of which will put the economy “on a strong medium term growth path.” With that in mind investors should consider careful purchases that benefit from the new direction the economy is taking, by choosing stocks that research recommends and suitable specialist funds.
Private banks and wealth management firms typically cater to wealthy clients with around $US5 million in investible assets or more. Foreign currencies or individual overseas stocks may not be appropriate for most investors.
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