Investors can expect increased market volatility next year, according to Katie Nixon, Northern Trust’s chief investment officer for wealth management.
“We’ll see tapering in March,” Nixon said in an investment outlook and year-end planning briefing in New York last week. She saw the Federal Reserve’s exit from its bond buying strategy as a long slog, likely to result in increased volatility in stocks and bonds.
She acknowledged that the Fed could begin tapering earlier, especially if the December jobs report were positive. On Friday, the Labor Department reported a November gain of 203,000 jobs and a five-year low in unemployment.
Nixon and her colleagues expect the Janet Yellen-led Fed to focus on “enhanced forward guidance,” whereby it will provide an indication to investors, households and businesses about its stance of monetary policy expected to prevail in the future. Nixon predicted that the federal funds rates would continue to be low into 2015.
Governments will continue to focus on rebuilding economic growth, she said. At the same time, political volatility around the world will continue. “There’s little politicians can do,” Nixon said. “We see turmoil continuing.”
Few countries have embarked on necessary reforms in labor markets and entitlements, and the widening gap between “fiscal repair winners and losers” has ramifications for future global growth. Greece, in particular, still has a long way to go to climb out of its hole. In Germany, Chancellor Angela Merkel’s Christian Democratic Union party is under pressure from potential coalition partners to agree to a hike in the minimum wage. This would be a positive step, enabling Eurozone neighbors to become more competitive, Nixon said.
She noted that as China shifts its export-led economy to one more focused on domestic consumption, it will cede its role as the engine for global growth in recent years to the U.S.
Nixon said that global capital markets today advance the case for a global approach to asset allocation. Northern Trust is expanding its “separating company from country” theme, taking a bottom-up approach that looks at companies’ sources of revenue, which may come from regions far removed from their home countries.
Northern Trust’s asset class return forecasts are modest. Equities will be lower after last year’s run, and fixed income will be higher given steep forward curves. Emerging markets are “course correcting,” but valuations continue to be attractive. EM bonds will return 7 percent over five years, and equities 10.1 percent. Private equity will produce a compelling 9.6 percent over five years.
In terms of year-end tax planning, 2013 and 2014 rates are scheduled to remain the same. This means that deferring income and accelerating losses and deductions can provide overall tax savings, but timing decisions should account for the Alternative Minimum Tax and future income spikes, according to Suzanne Shier, director of wealth planning and tax strategy.