Improving Economy to Benefit Equity Markets in 2014
NEW YORK ( MainStreet) The more global markets and economies improve, the more they begin to resemble their pre-2008 recessionary levels, according to the consensus among Prudential market experts at their 2014 Global Economic and Retirement Outlook briefing in New York.
"The new normal is beginning to look like the old normal," said Ed Keon, managing director of Quantitative Management Associates. "Our investments are the same as they were six months ago. We are overweight in high yield and in stocks versus bonds."
Keon says he's making small tweaks out of the U.S. with some investing in Europe, Australia and the Far East.
Keon and his colleagues predict significant growth in the financial markets in 2014 as the U.S. and global economies continue to recover amid central bank actions, low inflation and an improved business climate.
Despite the Federal Reserve's initial steps to unwind its massive bond-buying program, Prudential Fixed Income Chief Investment Officer Michael Lillard sees opportunities in higher-quality high-yield bonds, longer-duration investment grade corporate bonds and short-duration emerging markets debt.
"With the 10-year treasury rate skirting three percent, we think the market has already priced in the Fed's taper and that rates should hover around current levels unless economic growth surprises to the upside or the Fed moves more aggressively than expected to end its bond purchases," said Lillard.
Growth is expected to be driven in part by technological innovations and an upswing in energy production in the U.S. and around the world while the Federal Reserve is expected to remain on the sidelines for the next couple of years, keeping interest rates low, even as it begins to taper its bond-buying program.
"There's no sign of inflation," Lillard said. "It's well below the Fed target of 2% and given low inflation along with high unemployment, we think rates will stay at zero through 2015."
A major focus for U.S. investors in the new year will be the change in chairmanship at the Federal Reserve from outgoing Ben Bernanke to Janet Yellen.
"Monetary policy is moving into a period where Dr. Yellen will be focusing on forward guidance. The economy is getting better," said Prudential Market Strategist Quincy Krosby. "The question that we have is how forward can forward guidance carry us."
Forward guidance is a tool used by central banks to exercise power in monetary policy to influence the future levels of interest rates with their own forecasts and market expectations. Abroad, international markets performed well in 2013 but are expected to do even better this year because of global growth.
"There should be opportunities in these markets to rise by 20% to 25%. Japan grew more than 50% in yen and Europe is up 20%," said John Praveen, chief investment strategist for Prudential International Investments Advisers. "The wild card is emerging markets with elections in Brazil and India."