At CFA dinner: What Bets are Good for 2014?

Mr Jakobsen is looking at a sell-off of equities in the US and in Singapore.

He is expecting a weaker Euro and stronger Yen.

His personal investments are 70% to 90% in investment grade bonds, and he finds 5- to 10-year bonds most attractive.

Mr Hou Wey Fook (Managing Director and Chief Investment Officer of Bank of Singapore and panelist at the Forecast Dinner), is bullish on the equities market.

He is expecting a nice rally in the S&P, tapering to be near completion by year-end and a stronger US dollar.

His personal investment portfolio is 90% to 100% in stocks.

"My central premise is the US will be the market that will do very well compared to the rest of the world.

The US accounts for 55% of the world’s equities market. As it starts to recover, it sucks the excess liquidity out from every corner of the world.

You are seeing the effect of that in stocks and currencies, and that has some way to go.

The US economy is recovering nicely because it has become more competitive. Its wages have been stagnant for the past 10 years. Today, it is the most competitive economy in the world. The shale gas boom has also made it more competitive.

The US will continue to attract a lot of cash out of the emerging markets. You can see this coming from the massive amounts of cash allocation in Singapore private banks - currently in the region of 30% to 40%. (Singapore is one of the world’s largest private banking centres.)

I am extremely bullish on US equities. Valuations are not cheap, but not overly expensive.

I am completely invested in US exchange traded funds."

Ashish Goyal, CFA (Investment Director of Eastspring Investments (Singapore) and event panelist) is looking at the US Fed tightening as the main factor influencing the markets.

He is expecting a weaker Euro and no change in the Yen.

He has a balanced portfolio.

"Most of the forecasts will be wrong at the end of the year, but what is important is the thinking behind them.

My framework of thinking is the world’s got a mountain of debt. To chew through that debt, you need growth. I don’t think the growth is coming through.

You face a tough environment this year and for the next several years if you are thinking of making a lot of money.

Investment returns will be much harder to come by compared to the last 10 to 20 years.
In that kind of environment, inter-correlated instruments will do very well.

In the last 4 to 5 years, dividend stocks have done very well - much better than they have done over the very long term. I think that will be a recurring theme.

My background is mainly in equities, but I’ve done other things. One of the challenges that I’ve had is: How do you value equities when there is severe mispricing in government bonds? What is your cost of capital?

In normal circumstances, you derive your cost of capital from the return on 10-year government bonds. When government bonds are abnormally priced for a long time, as in the case of Japan, how do you value equities?

Should equities trade at 15 to 16 times earnings, which may be the market average? Or should they trade at higher valuations, given the low interest rates?

I don’t share the optimism that markets will go up. I do care a lot about valuation and I don’t see great valuation in equities anywhere in the world.

You can always find a company with great business. But in general, it is very hard to make the case to be long on equities.

Most of the money in my personal portfolio is in fixed income. Duration in my portfolio is a bit shorter than I would like it to be and I will have to rethink my portfolio.

I’m not optimistic about the US shale gas boom. I think in this year and the next, people will see how little economic value that has created for the operators of shale gas."

Ng Kheng Siang, CFA (Asia Pacific Head of Fixed Income State Street Global Advisors and event panelist) is expecting tapering to be complete at the end of this year and a sell-off in US 10-year Treasuries.

He has a balanced portfolio.

"I don’t think the Fed wants to rock the boat by changing their forward guidance unless they see strong evidence of data that warrants a shift from the view it has given.

I think they want to give the market a sense of certainty so that the market can see where they are going.

The market is well-prepared for what Janet Yellen said about the tapering being completed at the end of this year.

They are looking at some form of recovery and normalization of the interest rates that will soon come.

In the fixed income world, as the Fed tapers off its asset purchase program and starts thinking about raising Fed funds rate in the future, the bond market will start pricing in higher yields.

I think bond yields will have to adjust upwards.

As the economy continues to improve, I believe the S&P will likely  do fairly well (up around 10%), but not as well as last year. Similarly for the STI.

The rebound in economic growth will come but not from a strong base. I don’t think the economy will rebound as strongly as in the past. In the past, when there was a recession or weak growth, we tend to see a V-shaped recovery, but we are not seeing that this time round.

I don’t think the economy is strong enough to warrant a much stronger yield.

I think that even when the Fed starts normalizing interest rates, it will do so at a very slow pace.

I will still have some allocation to bonds, but more on corporate bonds rather than government bonds. I think credit spreads will tighten a little further.

I still believe in the stock market recovery, so I personally still have exposure of 10% to 30% to stocks. I would also keep a fair amount in cash because I think there will be opportunities for investors to tactically shift asset allocations around.

I will only buy bonds when they trade closer to 3-1/4 to 3-1/2. At a turning point, there will be opportunistic trading opportunities. So, I have some allocation in alternative investments based on global macro factors."