The hottest investments to make your 2014 fortune
IT'S three years since Ireland has been able to ring in a New Year without the €85bn bailout hanging over us. With Europe and the US expected to start getting their economies back on their feet this year -- albeit slowly -- optimism is in the air.
The sniff of an upturn in the world economy has encouraged many investors to become more upbeat -- and cast off the cautious investments they chose this time last year.
"During the course of 2013, investors started to look for more growth opportunities," said Andrew Milligan, head of global strategy with Standard Life. "They became less interested in fixed income investments and more interested in real estate, commercial property and equities. That's still pretty much the way it is now."
Last year, many investors made a killing from Japanese, US and European shares. Investors in Irish government bonds and certain Irish shares also had a good run -- the Irish Stock Exchange was one of the top-performing European stock markets last year and Irish govern-ment bonds outperformed most others in the eurozone.
Many of those who put money into funds which invested in small British or European businesses did well, too. Standard Life's Synergy UK Smaller Companies fund, for example, made an annual return of about 27 per cent over the last five years. The life assurer's Synergy European Smaller Companies fund has also delivered a strong return -- it is up about 25 per cent a year over the last five years.
But will the investments continue their winning streaks in the New Year -- and what will be the hottest investments for 2014?
Developed stock markets, which include markets in the US, western Europe and Japan, have done quite well over the last year. However, moves by the US central bank, the US Federal Reserve, to trim its bond-buying programme -- a system it used to prop up the US economy since the 2008 financial crisis -- could trigger volatility in those stock markets.
"We would not be surprised by a modest setback in developed stocks in 2014 after the terrific run they've enjoyed in 2013 -- but we doubt it will be deep or long-lasting," said Pat McCormack, head of wealth and investment manage-ment with Barclays Ireland. "We anticipate the returns here will exceed what we expect in 2014 for most other investment assets. Overall, barring a recession or big cost-push inflation, a plausible rate of earnings growth for developed equity markets in 2014 and 2015 might be around five to 10 per cent a year."
Standard Life is also tipping British, US and Japanese stocks. "There are better prospects for dome-stic demand in Britain," stated the life assurer in its 'Investment Picks for 2014'. "The other favoured equity markets include the US and Japan -- reflecting our forecasts for better corporate earnings' growth into next year."
Tread carefully, however, if you're considering US stocks, warned Rory Gillen, founder of the online investment newsletter, GillenMarkets.com.
"Things couldn't seem better for investors in US equities," Gillen said. "The Federal Reserve is confident that the US economy is improving... But we know that the US stock market is quite overvalued, so the risks are also higher than normal. And an economic recovery based on massive liquidity injections has no parallel in history."
Gillen said his personal stock favourites include Colgate, Proctor & Gamble, Coca Cola, Kellogg, Reckitt Benckiser, Unilever and Diageo. "These companies make and sell products that consumers do not tend to cut back on in recession," said Gillen. "Wherever the growth is in the world, they tend to find it. They are not overvalued. Less chance to make a big return on them perhaps --but much less risk also."
Although foreign buyers have been busy snapping up office blocks and hotels in Ireland, if you're consid-ering investing in Irish commercial property, you may have missed the boat.
The average yield for prime offices in Dublin's central business district is about six per cent, according to Standard Life.
"However, yields could tail off in the next two years," said the life assurer's 'Investment Picks for 2014'. "There is also an issue of 'over renting'. For example, at the height of the market in 2007, rents were about €600 per square foot -- but they're now around €300."
If you're interested in investing in property, regional shopping centres and prime city shops in Britain could be worth a bet this year, according to Standard Life. The life assurer also believes that offices in Munich, London, Tokyo and Sydney could be good investments for 2014, as well as some Canadian property and property in Seattle and Los Angeles. "We see value in US real estate, such as warehouses in LA," said Milligan.
Standard Life believes that European government bonds could be worth investing in this year.
"The European Central Bank cut interest rates a few weeks ago and it has made it clear that if European growth remains slow, it will take further action [to address that slow growth]," said Milligan. "That stance has been supportive of European government bonds."
If you're considering investing in European government bonds, you should only expect a modest return, according to Milligan. "You're unlikely to get double digit returns but the returns should be better than cash," he said. "Some EU bond markets look interesting. However, if European banking union is a disaster, we're into another game entirely."
When Europe was at the height of its debt crisis in 2011, investors flocked to gold. The tide has turned and gold was one of the worst performing investments in 2013.
"Many believe that with healthier economies and the absence of inflation, precious metals are no longer required," said Gillen. "This pushed down the price of gold by 30 per cent in 2013. The price of silver dropped 40 per cent."
McCormack said he sees "no compelling reason" for investing in gold this year. "Energy remains our preferred segment in commodities," he said.
Despite this, it could still be worth investing a small fraction in gold. "If you want to cover the risks of recession and inflation, it's a good idea to invest 75 per cent of your money in the global consumer franchise stocks and 25 per cent in the gold and silver miners," said Gillen.
Keeping your money on deposit is unlikely to be a winning formula in 2014 with interest rates expected to remain at record lows. A pick-up in inflation could also gobble up any return you make. "In 2013, we highlighted to investors that holding large amounts of cash could significantly impact their returns," said McCormack. "We still don't see cash as attractive in its own right and are highlighting that a balanced portfolio can continue to perform well enough to justify moving out of cash. However, as the US Fed trims its bond-buying programme, we're also suggesting keeping some cash in reserve for opportunistic moves."
Although European bonds could be promising, US and British government bonds are unlikely to be wise investments this year, said Milligan. "It's clear in the US that the Federal Reserve is starting to pull its support," he said. "The British economy is quite positive -- and this is not a helpful backdrop for the UK bond markets."
THE TIDE COULD TURN
If the world economy takes an unexpected turn for the worse in 2014, investors could return to the cautious investments they favoured when the crisis kicked in. The steps taken by the US Fed to tighten its monetary policy will have a big bearing in 2014 -- particul-arly if the moves backfire for the US economy.
Developments in European banking union will also be closely watched. "It's very important that investors feel that European banks are on a firm footing after this whole series of bank stress tests and reviews," said Milligan. "The most important thing is that companies make profits and start to use those profits to hire people and invest. Stock markets would be very assured if that happened."