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Where will the investment opportunities be in 2014?

With 2013 seeing much of the value go out of both equity and fixed income markets, advisers are looking to unloved sectors such as commodities and refocusing on value areas within markets in what looks set to be a challenging new year for hunting down investment opportunities.

The lack of value became a greater concern for investors towards the end of last year as equity markets continued to push higher while many bond assets had already been deemed expensive.

Bestinvest managing director Jason Hollands believes this trend is likely to continue in 2014. He says: “With some indices now trading at or near all-time highs, the outlook for 2014 is considerably more nuanced in our view that it was just a year ago.

“While the continuation of extraordinary stimulus programmes could propel risk assets much higher, and anaemic growth suggests policy will need to remain accommodative, there are less obvious bargains to be found than 12 months ago.”

Chase De Vere head of communications Patrick Connolly says the lack of value in equity markets could ultimately lead to a market correction in the year ahead. 

He says: “With fixed interest overall still looking expensive, we favour equities over the longer term.

“But markets have risen strongly in the last couple of years and there is currently no equity market that is looking cheap. So I would not be surprised if we saw some sort of correction in the near-term.”

Yet Chelsea Financial Services managing director Darius McDermott argues equity markets have not become overheated, with “selective opportunities” still to be found in the US, UK and Japan in 2014.

Within developed markets, McDermott adds large and mega-cap stocks could be set for a period of good performance this year after the success of small and mid-cap companies last year.

By contrast, areas of the market that are still cheap actually look less attractive, according to McDermott. He says: “Asia and emerging markets on the other hand are, by and large, cheap. Particularly China and Russia. They are also completely unloved.

“Usually I would say this is a buying opportunity, but I am struggling to see a short-term catalyst for change. I am not convinced the returns will make up for the extra risk being taken, so I will keep my powder dry on this one and revisit next Isa season when there may be a stronger case.”

The outlook for monetary policy also had a significant impact on market movements over the course of 2013. Hollands believes it is important to stick to markets where policy is likely to remain accommodative throughout this year.

He says: “Policy is going to continue to be a primary driver of markets.

“In an environment where real growth remains fragile and valuations are less compelling, we think the right strategy is to favour markets where monetary policy is likely to become more proactive over those where such stimulus could potentially be wound down or which have been co-beneficiaries of such quantitative easing programmes. This leads us to favour Europe and Japan over markets such as the US, UK and emerging markets for 2014.”

Whitechurch Securities head of research Ben Willis is refocusing on areas of what he describes as “deep value” within the US and European markets heading into 2014.

Willis says: “In terms of our contrarian views we are looking at deep value plays in Europe through the £186.7m Invesco European Equity Income fund which has a value bias and some exposure in periph-eral Europe, including Spain and Italy.

“Europe should only need to continue seeing some growth for these stocks to experience a real re-rating.

“We are taking a similar deep value approach to the US to focus on cyclical, domestic and consumer-facing names but we will probably plan to play this theme for a bit longer.”

Commodities are also highlighted by some advisers for their value after investors largely fell out of love with the sector following a slowdown in Chinese growth during 2013.

Willis says while he will continue to avoid gold in 2014 there are opportunities elsewhere within mining and resource companies.

“Mining and resources is such an unloved area but there has been a complete sea change in the management of mining companies that no longer sees them focused on things like capital expenditure and are paying more attention to shareholders instead.

“Our contrarian commodities play is the BlackRock World Mining Trust.  It has an income focus and crucially does not hold any gold. We are still quite anti-gold at the moment.”

Willis also stresses that even with the immediate value and changes occurring in the mining sector, this investment theme could potentially be a slower burn.

Investment Quorum chief executive Lee Robertson is also eyeing opportunities within the commodities sector. He says: “We are paying particular attention to commodities.

“If the global recovery quickens in the year ahead, we think commodities could benefit.”

Despite most of the attention currently turning away from bond markets, Robertson argues inflation-linked bonds still look attractive.

Robertson says: “We still like inflation-linked bonds. We got in there early and remain quite happy to stick with it. 

“However, we still do not find sovereigns and gilts particularly attractive. We are much more about the equity rather than the bond play overall.”

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