Citywire printed articles sponsored by:
View the rest of this gallery online at http://citywire.co.uk/wealth-manager/gallery/a725929
10 bold investment predictions for 2014
by Robert St George on Jan 03, 2014 at 09:43
We've trawled through our inboxes to highlight some of the interesting predictions for 2014. So who's expecting smugglers to have a profitable year and perhaps the boldest of all - who imagines Wetherspoons will start showing the football?
Wealth Manager looks beyond the equity managers who are bullish on equities for 2014 to highlight 10 brave bets for the year ahead that run counter to received wisdom. Who’s expecting smugglers to enjoy a profitable year, who’s backing active over passive, and – boldest of all – who imagines Wetherspoons will start showing the football?
First, the good news: we’re all going to feel richer this year. According to Steve Davies, co-manager of the Jupiter UK Growth fund and manager of the Jupiter Undervalued Assets fund, in 2014 pay should rise faster than inflation.
‘The most compelling evidence that UK wages are finally beginning to outpace inflation comes from a monthly report on take-home pay from VocaLink, one of the country’s largest payments systems companies. In its latest report, take-home pay rose 2.4% in the three months to November, with the country’s all-important services sector seeing even faster growth of 2.7% over the same period. At the same time, UK consumer price inflation fell in November to a four-year low of 2.1%.
While the official data on average earnings paint a gloomier picture, with earnings up 0.9% compared to a year ago, these figures do not take into the account the impact of the increase in personal tax-free allowances or the cut in the top-rate of income tax in April 2013.
As such, we believe that the VocaLink report offers a more accurate picture, and one that clearly shows that those in work are now seeing their pay rise faster than the cost of living. Further support to this view comes from Asda’s latest Income Tracker for November, which shows that discretionary income (i.e. after spending on essentials like food and utilities) is rising again after a sluggish spell during the summer.’
As people feel wealthier, many are predicting another bumper year for shares. But with 2013 having brought strong gains across the FTSE, is there any value left among UK equities? Alex Wright, Citywire AAA-rated manager of the Fidelity UK Smaller Companies fund, has identified one attractive area from which many have been running.
‘One sector I think offers investors a great risk/reward payoff at the moment is secondary property. These stocks, which own and develop property outside of prime city centre locations, have been trading at deep discounts to their net asset value for some time, as investors have considered their portfolios too risky given resoundingly negative views on the UK economy and the consumer in particular. If you can identify cheap stocks with good quality assets and upside potential from development, I think these could turn into profitable investors in 2014 and beyond.’
Jonathan Jackson, head of equities at Killik & Co, tips a stock that has been unpopular for different reasons. HSBC had a weak 2013, its share price rising just 2% through the year while the FTSE 100 climbed by 14%. Yet Jackson sees reasons for optimism ahead.
‘HSBC is one of the few truly global banks, able to offer full service banking in most regions of the world, with its network covering over 90% of international trade and capital flows. This provides a significant competitive advantage as the group is able to act on both sides of trade flows, for instance in Asia and the US. The group has a diversified income stream, which will diversify further as earnings from North America normalise. The group has a low-risk balance sheet, with diversified funding and assets, while strong capital provides a buffer against new regulatory proposals. Significant amounts of excess deposits, invested in central bank reserves and government securities, means the group will be a beneficiary of higher interest rates. There is potential for further cost savings and the prospect of attractive dividend growth.’
Striking a different note is Will Goodhart, chief executive of the CFA Society of the UK. He reckons 2014 could be another year to forget for the banking industry, following a year in which the Financial Conduct Authority and its predecessor the Financial Service Authority levied fines totalling £444 million.
‘What is not in doubt is that the present emphasis on ethics and professional standards among policy-makers, regulators and – increasingly – clients will persist. The series of fines levied on banks for their parts in the known scandals has further to run and the focus will return to professionalism in banking in the first half of the year with Sir Richard Lambert’s report to the Parliamentary Commission on an appropriate route to higher standards.’
If animal spirits are depressed in the banks, though, they are roaring in private equity houses. Bob Bishop, partner and head of UK corporate at DLA Piper, foresees a ‘resurgence’ of private equity deal making in 2014.
‘With debt more freely available and an increased willingness to fund all equity deals, private equity bidders are again a very credible alternative in most auctions. At the same time, US investors continue to hunt aggressively for bargain deals in the EU region. As a result, competition for assets is getting fiercer, and issues that previously would have stymied transactions are being resolved or even overlooked in favour of getting deals done.
It certainly feels like we’re entering a more sustained period of activity in the M&A market, based in part on underlying fundamentals and increased confidence, but also perhaps on a fear of being left behind. The herd is moving.’
In contrast, pessimism shrouds the outlook for one of the most important frontier markets, Nigeria, and the rest of Africa by extension. Elizabeth Stephens, head of credit and political risk advisory at JLT Credit, Political & Security Risk, warns of a year of conflict.
‘In Nigeria, the 2014 primaries and early 2015 general elections will fuel regional and sectarian tensions in a context where President Goodluck Jonathan, a southerner, is an increasingly polarising figure in the north. The ruling party – the People’s Democratic Party (PDP) – now faces a unified opposition coalition that enjoys a political advantage in much of the north and the economic heartland around Lagos in the southwest.
Should the PDP’s splinter faction hold together as a third-way alternative, the Jonathan administration will find itself on the defensive in the north as it carries out a controversial and bloody counter-insurgency against Islamist militants Boko Haram, who will exploit this dynamic and step up its attacks across the country. Rising political polarisation and armed rebel movements pose a threat to the overall investment picture.’
More broadly, Stephens cautions that ‘2014 will prove to be a profitable year for the region’s smugglers, kidnappers and terrorists’.
Political risk may prove to be more of a positive for investors in India, argues Kunal Desai, manager of the Neptune India fund. Desai challenges the presumption that the likely election of the nationalist Narendra Modi will stoke tensions and prompt investor flight.
‘India will conduct its general elections before May. Opinion polls are suggesting that the incumbent Congress party is likely to lose seats, with the pro-reform political party, BJP, likely to gain at its expense. The market will be enthused by this result and we would expect it to re-rate strongly. The prime ministerial candidate of the BJP, Narendra Modi, has an impressive economic track record in his state of Gujarat and a splurge of much needed economic reforms should come through if they are successful. Exit polls from recent state elections point to a significant shift towards BJP – this should be viewed positively.’
Within fixed income, another widely shunned asset class for 2014, Psigma chief investment officer Thomas Becket thinks one fund could buck the trend: Airlie Select US High Yield.
‘Asset allocating to fixed interest markets should only take place with a stiff drink in your hand. The threats of rising bond yields and the reduction of QE stalk today’s bond investor. We are increasingly being very selective when it comes to bond investing and almost exclusively focusing on specialist managers on specific opportunities.
Airlie manages one such fund, investing in US small cap high yield bonds. The managers only invest in bonds that have a small issue size, are trading below par and yield over 8%. Contrary to popular belief, such opportunities still exist despite the ‘Great Collapse in Yields’ enjoyed in the last five years. Finding them means going against the pack, avoiding the big funds and being prepared to take some liquidity risk.
However, such a pursuit should reduce elements of omnipresent duration risk and the fear of illiquidity in the behemoth funds. You also get paid a 9% coupon. Is this compensation enough? Probably, although there will doubtless be some nervy moments when sentiment worsens. However, we expect this excellent team to deliver great returns to our clients in the next five years.’
Others have reached similar conclusions about the value of backing the best managers. For Moz Afzal, chief investment officer at EFG Asset Management, going active rather than passive will be the crucial call for the year ahead.
‘We think active management, which worked well in 2013, will remain the key to success in 2014. There are a number of reasons for this. In China, and indeed many emerging markets, stock market indices remain distorted by the inclusion of companies which are largely state owned, often resulting in low liquidity. In all markets, there are certain companies and sectors which we would rather avoid because on ongoing economic or structural issues or because their valuations are too expensive.’
Finally, investors must not overlook the most important event of 2014: the World Cup. Leigh Himsworth, head of UK equities at City Financial, has some ideas on who will win.
‘The bookmakers are in line to trade well given the football World Cup, but which will get the Golden Boot? GVC is the largest online gaming company in Latin America and has already ramped up its TV ads in anticipation of a busy summer.
Goals Soccer Centres, operator of outdoor football centres in the UK and now with an established presence in the USA with a site in Los Angeles, is outperforming its two major competitors and looks set to benefit from the soccer boom in America. With a more favourable winter climate compared to last year, and a boost from the World Cup, it could easily see earnings growth exceed expectations.
Other companies that could be celebrating are the pub groups. Brazil is only a few hours behind UK time, and broadcasters have already renegotiated the time of England’s opener against Italy to a more suitable hour for fans watching at home. Marston’s saw improved earnings in 2013, which were driven by pub restaurant expansion, and the group offers Sky Sports throughout its portfolio. JD Wetherspoon, on the other hand, has exposure to more of the big city locations; however, traditionally, they haven’t shown sports, mainly due to a lack of Sky licensing. We’ll watch this space to see whether they intend to screen the big games.’
More about this:
Look up the funds
- Jupiter UK Growth
- Jupiter Undervalued Assets Acc
- Fidelity UK Smaller Companies A Acc
- Neptune India A Acc GBP
- Airlie Select US High Yield A1
Look up the shares
- HSBC Holdings PLC (HSBA.L)
- GVC Holdings PLC (GVC.L)
- Goals Soccer Centres PLC (GOAL.L)
- Marston's PLC (MARS.L)
- J D Wetherspoon PLC (JDW.L)