Nick Hungerford, Nutmeg’s co-founder, and Shaun Port, Chief Investment Officer, provide their views on what 2014 may hold in terms of economic growth and change for the investment industry.
Financial markets: Recovery, equity highs and toxic bonds
– Shaun Port, Chief Investment Officer
As we come to end of 2013, developed equities are buoyant. We don’t think this is simply because of a quantitative easing (QE) inspired bubble; there are solid signs of growth and enough concrete reasoning to believe there will be further gains next year. We actually foresee the US tapering its bond-buying program at the start of 2014 and, while this may lead to short-term volatility, such tapering is a sure sign of a strong US economy which can only benefit global equity markets.
The QE effect has actually been more prominent in government bonds. After all, money started flowing out of bonds and into stocks only in the third quarter of this year – bonds were being well supported until then. Generally, bonds don’t look very attractive to us for 2014. They still have a role to play in any portfolio and short-term investment grade corporate bonds can still offer 3% yields, which is good for a low-risk investment, but bonds should be used cautiously.
Finally, we currently favour the peripheral European markets over emerging markets next year, as they offer good value. It’s still hard to see much evidence of a catalyst for emerging markets outperforming next year, after three years of poor returns. Many of the emerging market countries remain vulnerable due to high current-account deficits. Plus, weak Chinese growth has had a big knock-on effect across emerging markets.
Data sources: Bloomberg and Macrobond
Investment industry: RDR gap to close, pensions to come into sharp focus
– Nick Hungerford, co-founder
We expect the financial advice gap as a result of the Retail Distribution Review (RDR) to become clearer for all to see as we go through 2014. We will no doubt witness a lot more businesses restructuring next year, but we expect the independent financial advisers to continue to drag their heels. They’re reluctant to change and won’t do so until trail commission is taken away.
We think the debate around pensions will heat up next year. We think a significant overhaul is needed in the UK. Auto enrolment will help with pensions but not in a significant way – there will still be a huge funding gap.
We therefore urge the government to launch a super ISA in 2014, with a limit of £50k for those under the age of 50, and £25k for anyone over 50, with no inheritance tax on savings. While the government will lose out on inheritance tax, it will gain on dividend income and fuel investment into UK companies, and it will incentivise people to make big in-roads into easing their personal pension burden. The well-recognised ISA ‘brand’ offers the perfect platform for enhanced saving.
Potentially, there is also a huge property market problem on the horizon. We would like to see the government consider the American model of a fixed rate 25-year mortgage to ensure long-term low interest rates.
Risk warning: As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Past or future performance indicators are not a reliable indicator of future performance. A stocks and shares ISA may not be right for everyone and tax rules may change in the future. If you are unsure if an ISA is the right choice for you, please seek independent financial advice. Pension rules apply.
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Shaun Port
Shaun is the chief investment officer at Nutmeg. He has over 25 years’ experience developing and implementing investment strategies for clients ranging from central banks to pension schemes to charities and private individuals. Shaun holds a degree in Mathematical Economics from the University of Birmingham and is a Chartered Alternative Investment Analyst. He can be found tweeting @ShaunPort.Other posts by Shaun Port