Heading into 2014, equity markets from a global perspective are not overvalued, but they’re not cheap either, according to a report from Manulife Asset Management.
Its Global Intelligence: The Outlook for 2014 report says the challenge with a fully valued market is that earnings growth needs to drive returns. And year-over-year double-digit earnings growth is required in order to get a low double-digit return for equities next year.
“Within this context, we think the U.K. is an attractive market for 2014,” the report notes, adding that it looks as if there is a more meaningful economic recovery in the country. “We think there are world-class U.K.-based companies that investors can find long-term opportunity in.”
Closer to home, the report says it expects the Federal Reserve’s decision to begin tapering quantitative easing in 2014 as a long-term positive.
“If the Fed moves as delicately as it intends to, we think it will create a good environment for U.S. equities, because it will signal the U.S. economy is no longer on life support and may be moving out of the intensive care unit,” states the report.
In the coming year, Manulife thinks high-quality companies with competitive advantages will benefit. It sees opportunities in the technology, e-commerce and financial sectors.
Areas that may be challenging for equity investors in 2014 include consumer staples, healthcare and utility sectors because valuations are fully priced and hold lower growth prospects in a recovering economy.
In Canada, the report predicts that the oil and gas and automotive sectors should perform well. But if the taper in the U.S. happens, interest rate-sensitive securities in Canada such as real estate investment trusts, telecom and utility stocks will start to underperform.
Bond ambition
Manulife believes there are interesting opportunities in the fixed income market as well, especially in emerging market government bonds in Asia.
“While some countries within the region, including China, have seen a slight economic slowdown, the region in general continues to outpace global averages,” notes the report.
It says Malaysia, Thailand and South Korea are all attractive because the debt-to-GDP levels are less than 55%, which is favourable when compared to many developed markets.
Europe has some opportunities as well, including Ireland.
“The Republic has made significant strides forward in improving its fiscal situation, and we believe that a credit upgrade could well be on the cards in the year ahead,” the report states. “Given this, we believe there is value in Irish government bonds.”
And, as the eurozone continues on a path to a solution to its sovereign debt concerns, Manulife expects that there will be some other attractive opportunities. But it doesn’t believe the risks outweigh the rewards in countries such as Greece or Portugal.
In Canada and the United States, corporates are projected to continue to outperform government bonds.
“The corporate bond index is expected to fare much better than government bonds and will likely not dip into negative territory,” the report notes. “High-yield returns should be the most resilient, relative to other bond asset classes in North America.”