In its outlook, SSGA forecasts accelerating growth in the US, and “modest” economic expansion in Europe – despite the fragile nature of its recovery.
Emerging markets are likely to be negatively affected by a strengthening dollar, meanwhile, but aided by improving global economic conditions, giving the region a positive long-term outlook.
Based on these expectations, SSGA highlights the following themes for 2014:
‘Fixed income in transition’
The beginning of US tapering will raise concerns over rising rates in the stronger economies, thereby boosting demand for fixed income assets favouring credit over duration.
These include: “high yield and loans, absolute return to cash benchmarks, and short duration corporate and floating rate notes”.
Growth in the eurozone will benefit peripheral debt and equities, while small caps and high yield debt should continue to perform well. Outside of the single currency bloc, SSGA is upbeat on UK corporate bonds and the UK financial sector.
Developing world bonds and equities offer “good upside” for 2014, but SSGA says investors need to be selective – given the sensitivity of EM nations to domestic and foreign policy. “[Countries] that fail to address reforms adequately are less deserving of investor attention”, it adds.
‘Over-valued safe havens’
Sovereign bonds have lost the “safe-haven appeal” they enjoyed in 2011 and 2012. This lack of value extends to other fixed income sectors, SSGA warns, narrowing the options for yield-seekers.
‘The changing face of correlations’
Last, achieving portfolio diversification will continue to pose a challenge, the company predicts, and a nimble “tactical asset allocation” approach will be appropriate next year. Favoured diversifiers include short-biased strategies, managed futures, property and cash.
“Recovery is the watchword for 2014,” writes SSGA global chief investment officer Rick Lacaille.
“While we are not discounting potential risks, like government and central bank policy changes or geopolitical issues that could disrupt the growth story, there are plenty of positives to catch the investor’s eye.”