He said as developed market health improved – with the exception of Europe, which was still faltering in its recovery – and as the results of the QE ‘experiment’ remained to be seen, investors faced a certain dilemma.
“Equities have had a great run for the past two years and now many developed markets are no longer cheap. Bond yields are low and the 30 year bull run is all but over. There is no clear winner,” CFS's managing director said as he delivered his outlook for 2014.
McDermott suggested cash would continue to short-change investors, calculating that still-low interest rates and the impact of inflation had seen the majority of savers lose 9% on their accounts in the last five years.
His forecast on interest rates rising was somewhat more bearish than certain market commentators, suggesting rates would not rise before the end of 2014, or even 2015 and would be gradual at best.
The Fed’s QE tapering talks had seen most government bonds decline, with gilt funds falling 4% on average this year. McDermott said he expected that would continue and said in the face of rising interest rates, the yields on investment grade and high yield were not delivering sufficient returns for the risks they carried.
That said, in order to satisfy investors’ need for diversification by holding fixed income in their portfolios, he was recommending Jupiter Strategic Bond and L&G Dynamic Bond Trust for their ability to be more nimble than straightforward corporate bond funds.
On equities, McDermott said developed market equities were presenting selective opportunities but urged investors to expect “a hiccup” when QE tapering finally took place.
Emerging markets and Asia were comparatively cheap though, China and Russia in particular. However, even with cheap, unloved markets, McDermott said he did not foresee a buying opportunity until the next Isa season.
In addition to Japan – his favoured developed market call for 2014 – and property, Chelsea’s MD is suggesting absolute return funds might be returning to favour.
“They've had a bad press due to both their complexity and the fact that quite a few have failed to deliver what investors expected: positive returns, whatever the market environment. There are some that have consistently delivered what they promised though and, with ‘cash-plus’ targets and very low volatility, I think they could be a good alternative for those wanting to focus on capital preservation.”
