• Equities to outperform bonds as the economic recovery continues across the world
• UK economic data has now improved significantly with growth forecasts for next year revised upwards
• First months of 2014 will be crucial for Japan – though Barings confident government policy  heading in right direction

Uk and japanese equities to drive multi asset returns into 2014

Strong economic momentum in the UK and successful government reforms in Japan will drive equity growth in both markets in 2014, according to Baring Asset Management (Barings), the international investment firm.  The firm maintains a preference for UK and Japanese equities within the Baring Multi Asset Fund, and has increased its overall weighting in equities in the Fund due to bullish global economic developments.

Barings believes that economic prospects for the UK are well supported while earnings expectations have not been subject to the same degree of over-enthusiasm that some parts of the world have experienced.  For Japan, 2013 has witnessed an excellent performance from Japanese equities as the government’s policy of renewed asset purchases has taken hold.

Andrew Cole, Investment Manager, Baring Multi Asset Fund, comments: “While the ongoing strengthening of Sterling as a result of better economic data and the prospect of rising concerns about a change in government ahead of the 2015 election could make us reassess our view on the sector, we believe UK fundamentals remain strong.  We also remain positive on Japanese equities though the government now faces the delicate task of dealing with politically sensitive structural issues, such as the reform of the labour market.  We are confident that government policy is heading in the right direction and that the necessary adjustments will be made. However, the first months of 2014 will be crucial for Japan and we remain vigilant.”

Overall, Barings is positive on global economic prospects for 2014, observing that US economic data continues to improve with the recent government shutdown only stalling upward growth.  The changeover in leadership at the Federal Reserve, with Janet Yellen assuming the role of chairman in February 2014, also suggests that monetary policy will remain in its current accommodative state.  In terms of Europe, although the Eurozone has not shown the same growth overall, the German economy is still expanding and should help drive a regional recovery.

Andrew Cole adds: “Looking into next year, we expect the global economic recovery to remain on track, with inflation remaining benign.  Central banks will look to become less active in their attempts to support the global economy, gradually reducing their asset purchase programmes over time.  This suggests that bond yields will slowly rise, as investors look to reduce their exposure to this asset class, in the absence of any major negative shock to economic growth.”

In the equity sphere, Barings believes that current share price valuations are reasonable, and can tolerate a small rise in government bond yields without overly damaging their potential for further growth.  As a result, Barings remains positioned for further outperformance in equities over bonds, although it recognises that equities are no longer quite as attractively valued as they were previously.  With a higher weighting in equities in the Fund than at the same time last year, Barings has looked to provide some protection through the use of put options in case bonds witness a more dramatic rise in yields or if corporate earnings suffer greater downgrades than expected.

Andrew Cole concludes: “Over the summer we increased our exposure to interest rate risk as expectations of a change in Federal Reserve policy faded.  We are now looking to take profits on this position and also to reduce the interest rate sensitivity in the portfolio.  We continue to expect equities to outperform bonds as the economic recovery continues around the world.  However, markets are likely to be more volatile and we will continue to monitor for any significant changes in policy by central banks or developments in earnings expectations.”