Russ Koesterich: A Look Ahead at 2014

by Russ Koesterich, Portfolio Manager, Blackrock

Last week, I shared my annual look back at how my 2013 economic and investment calls fared. Now, as we head into 2014, it’s time for my annual look forward.

So what am I calling for in 2014? As I write in my new weekly commentary, I’m sticking with many of the same themes as last year, with a couple of critical tweaks.

From an Economic Perspective: From an economic perspective, I expect growth to pick up modestly, both in the United States and globally. In 2014, I expect the U.S. economy will edge past the 2% growth rate of the past couple of years and come in around 2.5% to 2.75%. Global growth should accelerate from 3% in 2013 to around 3.5% next year. Despite somewhat faster growth, 2014 is likely to be another year of low inflation in most developed countries.

Although the Federal Reserve (Fed) has begun its long awaited taper, policy remains accommodative and supportive of the economy. Stronger household balance sheets also represent a tailwind.

I also expect an increase in real interest rates thanks to slightly better growth, though the Fed likely keeping the fed funds rate close to zero throughout 2014 should keep the rate rise modest. I would look for an increase of around 0.5% for the 10-year Treasury over the course of next year.

From an Investment Perspective: Against this economic backdrop, I continue to advocate that investors overweight stocks in their portfolios. Equities may not be as inexpensive as they were a year ago, but they remain more attractive than bonds and cash. That said, I do expect more market volatility next year, and I believe that investors should be selective within equity markets. In particular, I think international stocks and emerging market equities are worth investor attention, as they both appear more reasonably priced than U.S. equities.

Meanwhile, there are few bargains in fixed income markets. With rates likely to rise and inflation still low, I still advocate underweighting long-dated Treasuries and Treasury Inflation Protected Securities (TIPS), and sticking instead with fixed income credit sectors, including high yield bonds. Additionally, I continue to believe that muni bonds look attractive.

Of course, all of the above is merely a starting point for thinking about the year to come. For more information on my economic and investment views, I encourage you to check out these resources:

• 2014 Outlook—The List: What to Know, What to Do: Five “what to know” items and five “what to do” ideas for navigating the year ahead.
• Investment Directions: Our monthly look at global markets, including our asset allocation views.
• Squeezing Out More Juice: A detailed look at the year ahead from the BlackRock Investment Institute.

Russ Koesterich, CFA, is the Chief Investment Strategist for BlackRock and iShares Chief Global Investment Strategist. He is a regular contributor to The Blog and you can find more of his posts here.

Source: BlackRock Weekly Commentary