Morningstar's "Perspectives" series features investment insights from third-party contributors. Here, Shaun Port, CIO of Nutmeg, gives his outlook for the new year, as part of Morningstar’s Guide to Investing Ideas for 2015.
Looking to the year ahead, we think developed market equities remain a very attractive investment proposition, especially the US, which is now in a good place for economic growth. The UK too is a good long-term opportunity and Japan looks very promising as its high growth appears set to continue for a good couple of years at least.
UK stocks remain a strong long-term proposition
We frequently use the Vanguard S&P 500 ETF (VUSD) as a very cost-effective way of gaining exposure to equities in the big US-listed firms, and it’s also worthwhile looking at investing in smaller-sized US companies – we think the iShares S&P SmallCap 600 UCITS ETF (IDP6) is a good option for doing just that.
Meanwhile, Japanese equities are highly promising too and we’ve recently invested in our preferred ETF for Japanese equities, the UBS MSCI Japan GBP Hedged (UC62). The Japanese economy is going through a seismic shift in its outlook thanks to Prime Minister Abe’s reforms and Japanese companies can produce strong returns in tough global market conditions.
Through introducing the currency hedge in the fund we use here, we are aiming to reduce the effect of currency movements between the Yen and Pound Sterling to help protect investors against currency risks.
UK stocks also remain a strong long-term proposition, though we are staying a little underweight on UK equities for now, simply because the US is more appealing, while we think returns from UK bonds will gradually subside this year.
Germany too looks a good investment opportunity and a rare bright spot among the Eurozone where economic and political uncertainties are causing major turbulence. The German market has a wide range of quality companies with a global focus. Compared to other European markets and the UK in particular, the DAX has a greater exposure to consumer and technology businesses, which makes it a useful holding during periods of strong growth in developed and emerging markets. We favour the DB X-Trackers ETF (DBXD) which provides exposure to the top 30 companies listed on the Frankfurt stock exchange.
Away from the more developed and high-growth economies, Indonesia remains a very good isolated opportunity within the emerging markets landscape where there are signs of good growth and a progressive, forward-thinking infrastructure.
However, while there are clearly positive signs for investors ahead, it’s unlikely to be plain-sailing all the way this year. Uncertainty in the Eurozone and China is likely to create volatility in many financial markets. The growing problems in Greece could have many knock-on effects and we’ve recently sold our holdings in Italian equities with that in mind. We believe investors should generally steer clear of commodities as well, where there is significant volatility and continued uncertainty ahead.
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