FE Trustnet asked industry experts where the hype should be ignored, and which asset classes, sectors, regions or types of funds investors should be avoiding in 2014.
The US stock market
Brian Dennehy (pictured), managing director at Dennehy Weller & Co and a member of the AFI panel, is concerned about possible over-valuations in the US equity market.
The S&P 500, buoyed by the years of quantitative easing from the Fed and a strengthening US economy, had a particularly good 2013 – its best in the last decade – with returns of 29.1 per cent.
Performance of index in 2013
Source: FE Analytics
However, some experts worry that while the market has re-rated significantly, earnings growth has remained largely subdued.
Dennehy says that it is unlikely that the S&P can continue its stellar run and as a result he says investors should be avoiding the US stock market in 2014.
“As John Hussman says, 'it has now re-established the most hostile overvalued, overbought, overbullish syndrome' observed in history,” Dennehy said.
He adds that there have only ever been six points in time where the “indicators have flashed so red”, including 1929, when the market fell 85 per cent, 1987 when the index fell 20 per cent in a day, and in 2000 when the market fell by more than 50 per cent.
“Although these numbers relate to the US, history is clear that the UK stock market will follow where the US goes,” Dennehy said.
“Others note that the US stock market was only more overvalued in 1999/2000, which was the greatest stock market bubble in 300 years.”
“In fact, a number of high-profile former bears are now saying you should buy the stock market (US, impliedly UK) because we should assume such a bubble will now build. Dangerous.”
Corporate bond funds
Dennehy also says that investors need to be very wary of fixed income funds and to be especially selective in terms of their corporate bond exposure.
He says that the outlook for government bonds such as gilts is looking particularly bad, but warns investors that corporate credit could also have a poor 2014.
Certainly, investors have already started to take their money out of some of the largest corporate bond funds, with both of FE Alpha Manager Richard Woolnough’s M&G Corporate Bond and M&G Strategic Bond portfolios seeing outflows in excess of £800m last year.
However, Dennehy says that more investors should consider their exposure.
“Most UK investors aren't invested into gilts or gilt funds, but rather their close cousins, corporate bond funds. Perhaps surprisingly, the average corporate bond fund made money in 2013, although not a lot.”
Performance of sector in 2013
Source: FE Analytics
Dennehy says it will be difficult for the average corporate bond fund to perform well in 2014, as the underlying assets already look expensive.
He is also concerned that the best-performing funds last year, such as Kevin Doran’s Brown Shipley Sterling Bond fund and the Invesco Perpetual Corporate Bond fund, will struggle to maintain their performance.
“The last 30 years has been bonanza time for bond fund managers, as yields have fallen from double digits, pushing up capital values, and often doing better than the stock market,” he said.
“But that bull trend for bonds is probably over. And no bond fund manager has experience of having to make a turn in a long-term (multi year, possibly multi decade) bear market for bonds.”
“The best of them might well make money – derivatives provide much flexibility to slice and dice the bond returns, and even make money as capital values fall.”
“But advisers and investors will need to stay vigilant and chase the obviously winning funds – inert investors and advisers are certain to lose money otherwise,” he added.
Gold
After a decade-long bull run in gold bullion, the price of the precious metal has been in free-fall over the past 12 months.
Performance of gold over 1yr
Source: FE Analytics
Among the major reasons for the poor performance of gold are improving risk sentiment among investors, a lack of underlying inflation and the tapering of QE – which in itself is also linked to inflation.
Ben Willis (pictured), head of research, says investors shouldn’t see the recent fall as a buying opportunity and warns investors to steer clear of it over the coming year.
“One area that we are avoiding is gold. We just don’t like it,” Willis said. “It is a very speculative trade in our opinion, which in the past was based on the weakening of the dollar, itself a by-product of QE.”
“People were using it as a dollar hedge and we haven’t held it, which meant we missed out on its massive spike but also its subsequent fall.”
“It doesn’t yield anything and we don’t really understand what drives it, so we are happy to avoid it,” he added.
There are plenty who disagree with this view, however.
Star manager Alastair Mundy holds gold in his Investec Cautious Managed fund as he is concerned that QE will lead to higher inflation. He also thinks that equity markets are overestimating companies’ ability to grow their earnings to catch up with ratings.
