Investment Outlook

Investment Outlook first quarter 2014



"If everyone is thinking alike, then somebody is not thinking" George Patton, 1944

After a remarkable investment year in 2013 with very positive returns for equity holders, flat to slightly negative fixed income results and disappointing performance in commodities and precious metals, 2014 will be the year of reduced bond purchases by the Federal Reserve in the US. 

A likely continuation of the better economic numbers, led to upgrades for the US economy with the IMF calling for 3.5% growth in 2015. The United States seems to be in a sweet spot, turning again into the world’s biggest energy producer and benefitting from increased competitiveness based on lower energy costs. 

As long as the FED can manage the process of tapering without having it to lead to tightening and much higher interest rates, the equity markets could continue to do well. Although inflation in the United States will be higher than in Europe, it is not expected to derail this process. 

The big risk for global volatility is China. The process to move the components of growth from construction, infrastructure and investment towards consumer spending is a difficult and slow one. In the meantime, the government has to manage the credit mountain and looming problems in shadow banking. However, we believe that this will work out and that the Chinese economy will not experience a hard landing; 6% to 7% economic growth is still in the cards. 

Although the European problems have not made the headlines lately, economic growth has been subdued with unemployment stubborn at 12%. With the exception of Germany, most of Europe is weak with some recent pieces of good news out of Spain, Italy and Portugal. The strength of the Euro has not been helpful and further accommodation by the ECB will be needed. 

Emerging markets never really recovered from the “taper” scare in May and the countries with fiscal and current account deficits continue to suffer the most. However, with better economic news out of the developed world and China, and their devalued currencies, volatility and opportunities could arise during 2014 especially around the many elections which will take place this year in countries such as India, Indonesia, Brazil, Turkey and South Africa. 

Bonds are quite a different story. After a 30 year bull market where bond yields dropped to record lows during the spring last year, we would continue to stay short duration and stick mainly to bonds denominated in the reference currency, avoiding to get the low coupons wiped out by currency swings. This based on expectations of moderately higher interest rates, managed by accommodative Central Banks. Although we do not expect a decoupling of U.S. and European interest rates, there is no economic reason for long term rates in Europe to go up.     

Our moderate exposure in precious metals will be maintained as insurance against unforeseen developments with markets trading as if we are back in the Goldilocks scenario. 

At this crossroad into 2014, with relatively low interest rates, a further pick-up in economic growth, increased profits and an enormous amount of liquidity on the sidelines, equities still look attractive. Most commentators are positive to bullish, but the trillions of dollars, earning nothing in cash accounts have not moved yet. When this happens and equity markets are chased to even higher levels it will be time to reassess the overweight in stocks in our asset allocation.  



Because Japan is the third largest economy of the world and home to many leading and innovative multinationals, we are keen to invest in Japanese equities. At the same time, it can be difficult to find Japanese companies that meet our selection criteria. With our recent purchase of Nintendo, known for games such as Mario, Pokémon and Zelda, we believe we have added a Japanese company to our portfolio that meets our quality requirements. 


For every share that we buy and sell for our customers, a commission is paid to the broker, which in most cases is the custodian bank. For them, these commissions are an important source of income. Because this is an industry that we deal with every day, we used our first-hand knowledge when we selected a broker as a potential investment last year. We took a position in a company named Interactive Brokers.