Developed market equities such as the US and the UK had a stellar run last year as economic growth began to recover, central banks continued their large liquidity packages and investors felt more comfortable taking on risk.
Performance of indices in 2013
Source: FE Analytics
Given those returns, many market commentators expect returns from the FTSE All Share and the S&P 500 to be markedly lower this year. The major reason for this “cooling off” period, they say, will be because the rally has been largely driven by multiples expansion rather than underlying earnings growth.
However Greetham, who is director of asset allocation at Fidelity, says that a 20 per cent return from equities this year is par for the course, given the economic backdrop.
“Stocks were up 21 per cent last year, but I have been reading a lot of outlooks for 2014 and the majority of people seem to think returns will be a lot lower this year,” Greetham said.
“For me, in this environment the average annual returns should be 20 per cent. Just because we have had those sorts of returns last year it doesn’t mean we can’t see them again. That is why we are maximum overweight stocks.”
One of the reasons Greetham says stocks can replicate last year’s returns is because the US is escaping the global debt crisis, pointing to the fact that the banks recapitalised early and that monetary policy is set to remain loose for some time to come.
He is also turning increasingly positive on the strength of the economic revival in the UK, Europe and Japan.
However, the manager says that the major reason to be bullish is because of the lack of inflation.
“We have seen no real inflation in the western world. Commodity prices are weak and the Fed will keep its monetary policy relatively loose. The US economy is improving and so the dollar can strengthen over time.”
“All in all, this is very good for global equities,” Greetham added.
Greetham says the current “dis-inflationary recovery” is similar to the macro-economic backdrop in the late 1980s and during the 1990s.
“Despite this pick-up in growth, inflation is falling,” he said. “This is very good for stocks; in some respects we are back to the 1990s.”
“During that time there were quite a few economic expansions, but inflation was falling. The reason this is happening today is because we have lots of spare capacity in the economy.”
“Data shows there is 3 per cent of GDP slack, which means we could have 3 per cent faster growth over one year – or 1 per cent faster growth over three years – without triggering inflation.”
“That’s where we are now in the cycle. This dis-inflationary recovery is good for equities,” he added.
Greetham currently manages 12 funds at the group, including the Fidelity Multi Asset Allocator range.
He has been running funds in the IMA universe since May 2006, returning 40.56 per cent over that time while his peer group composite has made 34.12 per cent.
Performance of manager vs peers since May 2006
Source: FE Analytics
Greetham has also beaten his peer group composite over one, three and five years.
As well as having the maximum exposure to equities across his portfolios, he also has the minimum underweight position in bonds.
Investors in traditional fixed income assets such as government bonds had a particularly difficult year in 2013.
Last year signalled the end of a multi-decade rally in gilts and Treasuries as yields began to trend higher due to concerns over the Fed tapering its quantitative easing package.
Our data shows that the FTSE British Government All Stocks index has lost 1 per cent over 12 months while the ML US Treasury Master index has lost 6.03 per cent.
Performance of indices over 1yr
Source: FE Analytics
At the time of writing, a 10-year gilt yields 2.78 per cent, which is lower than one month ago.
Greetham says the government bond market is still very overpriced and – as there should be 2 per cent growth and 2 per cent inflation – yields should drift to around 4 per cent in 2014.
However, he says that won’t necessarily signal a buying opportunity in the asset class.
“I don’t see any reason why after three or four years yields won’t move up to 6 per cent,” Greetham explained.
“People think that we have already had a bear market in bonds because the majority of investors saw negative returns last year. However, in this environment we could have another bear market this year, next year and even the year after that,” he added.
Greetham’s largest fund is the £692m Fidelity Multi Asset Strategic fund, which sits in the IMA Mixed Investment 20%-60% Shares sector. It has an ongoing charges figure (OCF) of 1.6 per cent and requires a minimum investment of £1,000.
