What 2014 has in store for investors

BlackRock's chief investment strategist tells Craig O'Callaghan how political and economic events affect the asset management firm's work

Although there's no way of knowing for sure, one of the most popular new year's resolutions among students is almost certainly "manage my money better". Having received your January student loan instalment, your attention may well be turning towards ensuring you make the most of your money rather than spending wantonly to avoid an enforced month-long diet of value spaghetti hoops.

A similar objective - minus the spaghetti hoops - is faced by investors at asset management firm BlackRock. Having been entrusted with large sums of money by their clients, BlackRock is responsible for investing it in a range of assets in order to produce a good return. Typical clients include pension funds, insurance companies and retail banks, who invest pools of individuals' savings.

In order to ensure their clients' investments are successful, portfolio managers at BlackRock require in-depth knowledge of the financial markets and the wider political and economic environment, meaning there are few people better to ask for an opinion on what financial developments we can expect to see in 2014. To find out how investors can make the most of their money over the next twelve months, we spoke to Ewen Cameron Watt, chief investment strategist of the BlackRock Investment Institute.

Looking back at 2013

"2013 could be described as the year of the developed market equity. Equity prices are driven by a combination of growth in profit and the valuation of that growth in profit (the share price). Normally, a growth in profit is the more important factor to investors but in 2013 most major stock markets rose because of the value of shares rising rather than rising profits. That's what's known as a bull market."

"Elsewhere, investors lost money in developed market government bonds in 2013, after many years of strong and relatively predictable returns. Bond prices are closely related to interest rates. When interest rates decline, bonds paying a fixed coupon like government bonds tend to go up in price because investors are getting a higher return on them in comparison to more recently issued bonds. By contrast, if interest rates rise, the bond price falls."

"For the last thirty years, interest rates have been declining reasonably consistently on a global scale, meaning a steady rise in the value of government bonds. However, last year was difficult for investors in these bonds because interest rates in the major global economies were already around 0 to 1 per cent. As they couldn't decline much further, prices remained relatively static."

Predictions for 2014

"Either we'll move into a period where economic growth is quite strong and the expected interest rate rises and slowdown in US quantitative easing will happen quickly, or economies won't grow that strongly and these changes will come more slowly. Overall, it's expected things will be better than in 2013. For the first time in four years, economic activity in all five major regions of the world will grow."

Why investors will need to diversify

"Diversification is the principle that you have a range of assets in your portfolio so that you're protected if one asset class is doing badly. For a long period of time, bonds and equities have diversified each other, with different return patterns and volatility."

"However, now the financial systems are healing, governments are reducing the amount of liquidity they create which is likely to cause both bonds and equities to experience similar patterns of volatility. As a result, investors should be considering alternative businesses with streams of income that are long-term in their nature and not particularly volatile (for instance, businesses operating alternative energy sites such as wind farms)."

How 2014 will be remembered

"Hopefully, people will look back on 2014 as the year in which the financial system healed a bit more and regained some trust. It's important students don't believe finance is a Gordon Gekko-type world. Here at BlackRock, what we do today is about building a better financial future for our clients, using products that are transparent and trustworthy."

The importance of asset management

"It's immensely rewarding to be entrusted with safeguarding the livelihoods of ordinary people by ensuring their savings are invested properly. Societies fail if the financial futures of individuals aren't clear so it's good to be helping with that process. As the proportion of elderly people within our society increases, the more important our work becomes."

2014: The world goes to the polls

There will be some big elections and political changes this year, with over 2 billion people voting in some form or another around the world.

Scottish referendum

"Close to home, this poll will get a lot of attention. Currently, a "yes" vote looks unlikely based on opinion polls so the markets are anticipating a "no" outcome. A "yes" victory would mean a great deal of detailed work around how Scotland would be financed and how British government debt would be shared between the UK and Scotland. A "yes" vote would also have an important impact on the price of sterling and the UK gilt market."

European parliamentary elections

"These, to be held in May, are perhaps of greater importance, as this is the platform where anti-Europe political parties, such as UKIP, are likely to gain a lot of seats. We could end up with 25 per cent or more of the parliament's members being from anti-European political parties, which could mean some volatility in the value of the euro."

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