2014 Investment Outlook

December 2013  |  Download

Risk assets such as stocks and corporate bonds have further to run in 2014—even as a tide of easy money slows.

3 Key Points

1 Growth


Nominal growth is sluggish around the world—yet there
is potential for upside surprises as fiscal austerity fades.

2 Markets


2014 is the year to squeeze more juice out of risk assets.
Be ready to discard the fruit when it starts running dry.

3 Risks


Obvious investment risks are few; hidden ones are plentiful.
Watch (well-meaning) central bankers and rising correlations.


  • Our base case investment scenario, Low for Longer (55% probability), features tepid growth and loose financial conditions. The bullish Growth Breakout (25%) has growth accelerating and liquidity tightening. And the bearish Imbalances Tip Over (20%) highlights things that could go (very) wrong.
  • Liquidity provision will grow more slowly in 2014—and markets invariably focus on rates of change as much as absolute levels. Liquidity-crimping measures such as the US Federal Reserve’s scaling back bond buys will be partly offset by the Bank of Japan’s Godzilla-sized asset purchases.
  • Should we worry about the Fed’s (gentle) QE exit? It is not going to be a walk in the park, as some policymakers would like to think. We see it more as a triathlon in twilight. Policy words (forward guidance) replacing policy deeds (bond buying) equals a pick-up in rates and currency volatility.
  • As Low for Longer grinds on, imbalances grow. One is of particular interest to us as money managers: the potential for markets to overheat. Are we there yet? We do not think so. 2014 is the year to squeeze out more juice from markets—and be ready to discard the fruit when it starts running dry.
  • Bonds have long been expensive. The problem for stocks: The numerator of the P/E ratio (price) is driving returns, not the denominator (earnings). Rising correlations between bonds and stocks are making well-diversified, “safe“ portfolios riskier than they appear.
  • Diversification is like insurance: You do not need it—until you need it. Consider alternative investments for 2014. Some are real diversifiers (at least in theory). We like market neutral funds and strategies focused on “hard” assets such as infrastructure.

2014 Scenarios

Check out below how we see the economy, financial conditions, markets and companies. Learn how our scenarios are playing out across economies and view our preferred assets in our 2014 Outlook.

Learn more

2014 Scenarios


Big Picture

Helicopter View
We generally prefer equities over bonds, particularly in our base case Low for Longer scenario.

Risk in Safety
Equities and bonds are becoming more correlated. This is making “safe” portfolios a lot more risky.

Alternative Menu
Infrastructure, real estate and other alternatives are real diversifiers—and offer attractive yields in a low-rate world.

Volatility on Sale
It is better to buy an umbrella before the rain. Volatility is cheap and many assets are expensive.


Equity Value
Equities are not cheap—but they are not (yet) in bubble territory. We generally favor Europe and Japan on valuation.

Yield Caution
US yield plays will wrestle with tighter liquidity. Dividend growers still offer potential, as do non-US dividend payers.

Emerging Idea
Our contrarian idea: Overweight emerging stocks vs. developed. Be selective and favor indirect exposures (multinationals).

Fixed Income

Carry On
Many bonds still look expensive and risky (especially government debt). Go for carry (yield) in a barbell strategy.

Curve Plays
Low rates support short maturities. Tapering fears have hammered many long bonds back to reasonable valuations.

Beware Traffic Jams
Easy to get into, hard to get out of. Liquidity could dry up fast in some credit markets—when you need it most.

US Financial Advisors: More insights in 2014 Outlook: The List.

Video unavailable