The 2014 themes presented by Florent Bronès, Chief Investment Officer for BNP Paribas Wealth Management, aim in particular to provide solutions for the consequences of the likely, gradual reduction in liquidity injections during 2014.
For defensive investors, the quest for yield is still the main challenge. While long-term interest rates are expected to rise, his rise will prove to be slow and gradual. Interesting opportunities exist, which are addressed in the first three themes.
Theme 1 - Opportunities in the bond universe
High Yield bonds
A relative risk-reward ratio that remains attractive within the Fixed income area.
The default rates of issues of High Yield bonds expected to stay at a low level.
European convertible bonds
A bond area with a potential price appreciation linked to positive expectations for equity markets.
A less volatile asset class relative to equity especially in case of market turmoil.
Theme 2 – Alternative sources of defensive yield and return
Bond investors have enjoyed very high performance over the past few years. With the expected reduction of bond purchases by the U.S. central bank, we forecast bond yields to move gradually higher over the coming quarters. In such an environment, expected returns for quality government and corporate bonds are very low.
In this context, we have explored ways to look for yield income in asset classes other than fixed income.
We see opportunities in “Alternative UCITS funds” in the areas of “relative value” and “Long-short” equity strategies as they offer attractive expected returns while limiting the sensitiveness to a rise in interest rates.
Structured products can be used to enhance yield while keeping the sensitivity to interest rate increases low. The underlying assets can be very different in nature (oil, gold, equity indices, interest rates, etc.).
Theme 3 – The charm of dividend stocks
Perhaps not the best equity performers, but a valuable source of recurring income. A hedge for those who worry about inflation.
For more risk-minded investors, stock markets still offer good value, although one will have to be more selective than in 2013. A lot of themes we have played over the last months are still valid, but need to be slightly adapted. Others are new: yes we dare to look towards Japan again, and yes, contrarian to Malthusian pessimism, we believe that new technologies will help to solve tomorrow's challenges. Let's try to identify them and avoid paying excessive prices. Apart from equities, we could play currencies too. After all, the euro seems to be expensive.
Theme 4 - Quality at a low price
After these good performances, the potential for companies that can qualify as pure value plays has diminished. We nevertheless believe that the value theme will continue to outperform in developed markets. We recommend playing a strategy which combines value and quality criteria. Rather than relying only on measures of value, this strategy will also take into account the fundamentals of the company.
Theme 5 – The advantage of the Japanese liquidity injections
The Federal Reserve is thinking about tapering, the Bank of Japan isn't. Japanese stocks poised to benefit from Abenomics. Under such auspices, we recommend participating in this reflationary game.
Theme 6 – Capital expenditures will intensify
High probability of tangible recovery in capital expenditure. Among emerging markets, we think India will commit fully to new infrastructure projects.
Theme 7 - European competitive leaders: still a strong play
European stocks have performed well over the last quarters. We nevertheless believe that there's still more to come. There is indeed an increased confidence in Europe's future, even if the road to recovery remains bumpy. European stocks can benefit from this, especially those that benefit from a leading or expanding market share. A weakening euro would be an additional support for them.
Theme 8 - Go for technological innovators
Some technologies are expected to transform the environment of companies. We identify a number of notable technologies, which are currently emerging and can become big creators of value.
In our view, 3D printing, cloud computing, big data, clean energy solutions, automation and other technologies are capable of changing the face of the earth and have a good potential for development.
Theme 9 – Follow Emerging Asia in its growing focus on services
The services sector is the key beneficiary of changing patterns in investments and consumption (Education, Health, Financial Services, Travel and Entertainment). Tourism is one of the best examples.
Theme 10 - Undervalued currencies
The Euro is expensive on a broad scale, while other currencies are undervalued.
In the context of the expected change in the Fed's policy, which could fuel the nervousness of investors in parts of the equity market, the focus on currencies is an interesting way to integrate alternative sources of return. Given the structural volatility of currencies, they need to be closely monitored. That is why we will publish quarterly updates on our preferences among currencies.
According to Florent Bronès, Head of Investment Strategy at BNP Paribas Wealth Management:
“These 10 investment themes will enable us to cope with the end of the Fed's exceptional policy measures and to take advantageof the capital flow to the equity markets, markets that will benefit from the global economic recovery.”
About BNP Paribas Wealth Management
BNP Paribas Wealth Management is the world's 7th largest private bank, present in some 30 countries. Over 6,300 professionals, based in every major financial centre, provide a private investor clientele with solutions for optimising and managing their assets. The bank has €279 billion worth of assets under management (as at end September 2012).
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