Taking a broader look at 2013, equity markets performed particularly strongly in the developed world with rises of around 20-30% in tandem with moderate inflation and reasonable underlying growth. Quantitative easing also continued allowing markets a degree of flexibility, as well as the large South East Asian economies (in particular Japan and China) showing reasonable preference for reform into the new year. All of this vindicated Fiducia’s earlier actions in 2012 whereby portfolios were adjusted in anticipating of resurgent markets and increased rewards for risk taking.
In 2014, though current general expectation and economic figures appear positive, there are noteworthy factors on the downslide. Given the forward looking nature of markets, we may see slowing growth momentum as we move into the coming years, due to the structural reform and austerity both dampening the potential for growth resurgence and creating general market pessimism.
Further policy adjustments such as the tapering of Quantitative Easing will also play a part. This monetary policy strategy is likely to continue with interest rates at historical lows in the short term, as central banks will not wish to jeopardise fragile economic growth or increase the debt servicing burden on governments. Longer term it is likely we will see rates normalise, the effects of which are uncertain.
To take an even longer term horizon of around 10 years; of the 52 largest economies only 20 are expected to grow by more in the next 10 years as in the previous decade, which stems from both the current demographic trend of ageing populations and the need for government debt relief in the coming years.
All of these factors mean that looking ahead, the underlying risk/return trade-off is likely to deteriorate in the coming years and Fiducia will look to adjust portfolios accordingly. As such the asset composition will need to be dynamic and may accommodate portfolio diversifiers, such as infrastructure and property to a greater extent.