The gains made by key stock markets this year mean that 2014 will be a ’choppy sideways kind of year’ for investors in developed market equities, according to John Ventre, head of multi-asset management at Old Mutual Global Investors.
Ventre commented that while he is ‘broadly optimistic’ regarding the prospects for UK equities, the double-digit levels of return delivered by the index this year will not be a feature of 2014.
But he is more pessimistic regarding the prospects for US equities in the coming year.
‘My reason for being more pessimistic regarding US equities than UK equities is purely based on valuations,' said Ventre. 'There is an awful lot of good news priced into US equity valuations. The consensus is very positive on the US, but sometimes following the consensus view can be dangerous.’
Ventre added that whilst he had been ‘very very profitably bullish’ on Eurozone equities earlier in the year, he was quite pessimistic for the prospects of the asset class in 2014.
He elaborated, ‘The new year will be a year of deleveraging and stress testing in the Eurozone and its banks.’
Deleveraging is the process of banks writing down the value of potential bad debts currently held on balance sheets, and of trying to sell parcels of these loans if possible.
Stress tests are carried out by financial regulators to ascertain the true strength of banks' balance sheets, in order to prevent a future crisis emerging.
These constraints on banks are likely to contribute considerable volatility to Eurozone equity markets in the coming year, and if the proportion of bad loans is significant, could restrict lending within the Eurozone.
This latter fear over lending is part of the reason for the European Central Bank president Mario Draghi’s decision to cut Eurozone interest rates in November.
Ventre contended that the Eurozone is for long-term investors only, and that if one were constructing a portfolio in the present climate that was designed to be for the longer-term one would not invest in Eurozone banks.
On emerging markets, Ventre said, 'I don’t believe investors should treat emerging markets as just one asset class. There are more differences between many of the countries in this category than there are similarities.
'Certainly the varied basket of assets called commodities have more in common with each other than do many parts of what are classified within the emerging markets index.’
The one asset class on which Ventre was happy to paint a positive picture is that of Asian equities.
He told What Investment that the recent policy changes announced as part of the Chinese plenum made Chinese equities ‘significantly’ more investable, whilst there is potential to gain from Japanese equities on a more tactical basis. ‘The markets are very quick to price in good news on Japan,' he stated.