Chief Investment Officers of Merrill Lynch and U.S. Trust See Strong U.S. Economic Growth in a Transforming World

Tue Dec 17, 2013 11:38am EST

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Chief Investment Officers of Merrill Lynch and U.S. Trust See Strong U.S. Economic Growth in a Transforming World

The chief investment officers of Merrill Lynch and U.S. Trust today released their investment strategy overviews for 2014, including key themes investors should know to align their portfolios with macro trends in a transforming world.

In 2014, opportunities and risks in financial markets will be driven by an improving global economy, moderate inflation and gradually rising interest rates, according to Merrill Lynch and U.S. Trust. Their investment teams believe an understanding of the implications of these macro trends will enable investors to position themselves for the opportunities in addition to investing in longer-term transformational trends arising from technological innovation and demographic shifts.

The overarching themes in Merrill Lynch’s year-ahead CIO Monthly Letter reflect a positive outlook for the global economy, yet investors are cautioned to consider the potential risks in the year ahead.

“We recommend clients should first and foremost invest according to their goals and measure progress to these goals on a regular basis,” said Ashvin Chhabra, Merrill Lynch’s chief investment officer. “U.S. equities have had an excellent run, with the S&P 500 index rising more than 150 percent since the lows in 2009. There have been rallies in Europe and Japan recently as well. As the global economy and asset markets begin to normalize in 2014, we believe clients should take the opportunity to rebalance their portfolios, bringing them more in line with their strategic asset allocations.”

Chhabra added that he expects risk assets such as equities and credit to outperform again in 2014, but with an increased risk of an equity correction. “In an environment of lower liquidity and political risks emanating from Washington, D.C.’s budget battles and mid-term elections, investors should be sensitive to valuations and more selective among asset classes and regions,” he said. “We advise clients to not abandon fixed income as interest rates gradually rise to follow the path of higher growth, but to manage for rising volatility in their bond portfolios. Attractive valuations and a better economy favor technology, energy, autos and manufacturing sectors – what we call ‘Team USA’.”

In the U.S. Trust 2014 Investment Strategy Overview, Chris Hyzy, chief investment officer, said:

“We are heading into a macro and micro environment very similar to that of the mid-to-late 1990s, when the movie “Back to the Future” symbolized catalytic changes that would soon transform the world. Now, central bank policy is still easy, with or without taper; a coordinated global economic growth lift is underway; commodity prices still have a downward bias; profits should hit another record; job growth is improving; and inflation is well in check.

“Further, investment flows have only just begun to switch from more conservative asset classes to equities. Therefore, we expect multiple expansion and profit growth in the U.S. to drive the S&P 500 close to 2,000 by year-end 2014. Lastly, as the mid-1990s introduced the personal computer and the wired world, next year should further solidify the introduction of the mobile ecosystem, the cloud, and proliferation of robots. We are going back in time to understand the opportunities that can develop in the future.”

Merrill Lynch outlined 10 portfolio themes for 2014:

1. Equities again outshine bonds.
2. Invest in “Team USA” – Technology, Energy, Automobiles and Manufacturing sectors.
3. International equities prove resilient.
4. The equity rotation within the Great Rotation continues – (i) favor select cyclicals over defensives; (ii) U.S. large cap over small cap; and (iii) U.S. multinationals.
5. Fixed income is challenged by greater interest rate volatility.
6. The dollar strengthens.
7. Be selective in emerging markets and favor equities relative to bonds.
8. An expanded investment toolkit offers downside protection and diversification.
9. Within alternatives, hedge fund strategies and private equity best commodities.
10. Tax awareness pays off.

Merrill Lynch and U.S. Trust’s “A Transforming World” themes for 2014 and beyond:

1. The energy revolution.
2. The rise of the emerging market middle class consumer.
3. The accelerating change in technology and innovation.
4. The evolution of global real estate.
5. Transforming demographics.

U.S. Trust also anticipates these 2014 market themes:

  • The second stage of yen weakness.
  • The second stage of bond price pressure.
  • Equities to outperform bonds.
  • Cyclical over defensives.
  • Active versus passive investment management.
  • Lower stock correlations, stronger dollar, tax efficient strategies gain importance.
  • A more transparent policy picture overall.

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