A risky outlook for 2014

Investors looking for returns over the course of the coming year will have to use their imagination

The Ibex 35 index of leading Spanish companies gained 18.6 percent this year, but analysts say that shares are still undervalued.
The Ibex 35 index of leading Spanish companies gained 18.6 percent this year, but analysts say that shares are still undervalued.CARLOS ROSILLO

Investors will have little choice this coming year but to assume more risk than they are used to if they want to make any money, say analysts, brokers and fund managers who were asked by EL PAÍS. The stock exchange is a better bet than bonds, and there is cautious optimism that the Madrid bourse will continue to see gains. The experts advise against buying debt from the world's big economies, saying that interest rates may go up in the longer term. In terms of corporate credit, the best opportunities will be found from companies with mid to low credit ratings. Opinion is divided over the property sector, with some analysts seeing opportunities and others urging caution.

The three main factors that will impact share prices are economic growth, interest rates and international exchange rates. The market consensus is that the US economy will continue to grow, albeit below its potential, while Europe will steadily improve, and the emerging markets will be volatile. None of the major central banks are expected to raise interest rates in the short term, but there may well be a hike in mid- and long-term rates. The widespread view on currencies is that the dollar will begin to gain on the euro. "We like the idea of investing in the dollar for this year. We think there is room for appreciation. The US economy will continue to grow faster than Europe's, and the Federal Reserve is going to pursue a less-aggressive monetary policy. The current dollar-euro level is not compatible with growth in Europe," says Ángel Olea, head of investment at brokers Abante.

The stock markets

It's been a great year for the stock markets. The Ibex 35 index of leading Spanish companies gained 18.6 percent, reflecting healthy rises in Paris (15 percent), Frankfurt (23.4 percent), London (12.1 percent), and New York (24.1 percent). Despite the gains, the analysts say that shares are still undervalued, and that the stock markets offer the best risk-return ratio.

"The stock exchange, at least during the first part of the year, will continue to rise. Later, everything will depend on the efforts of the central banks to reduce quantitative easing," says Rafael Juan y Seva, the general director of financial advisers Áureo Wealth Advice.

Most analysts advise holding on to European shares. Wall Street is already at maximum highs, and the US economy is in a more advanced cycle than Europe's. Spain's bourse looks likely to continue growing, says BBVA Corporate & Investment Banking, gaining up to 40 percent in the coming two or three years. "We expect investors to begin to see the value in a possible change in trend based on the economic cycle and profits," says Antonio Pulido, director of BBVA Global Markets Research. Small- and medium-sized companies performed best in 2013, a trend that the experts say will likely continue next year. "We are now more inclined toward smaller companies, with clear competitive advantages and niche businesses that are more sensitive to the economic recovery, and that might even take place in Spain," says Irma Garrido, the head of Análysis de Ahorro Corporation. The banking sector is her recommendation for the coming years, along with a portfolio that would include Banco Popular, Banco Sabadell, CAF, Miquel y Costas, OHL, Repsol and Telefónica.

Fixed income

"High quality public debt, such as the United States' or Germany's, offers low returns, and maybe even a loss for the coming year," says Juan Luis García Alejo, of Inversis brokers. He suggests buying bonds from the European periphery. "Spain's 10-year bond could fall below 4 percent next year. There are clearly opportunities there," he says.

In terms of corporate bonds, the best opportunities are to be found in high yield or junk bonds, say the experts: the profitability of the companies with the higher credit ratings has largely been lost over the course of 2013.

"It is easy to understand why shares have beaten fixed-income investments this year. We are starting to see a return to a more stable environment after the global financial crisis, and the relationship between shares and bonds is returning to its former state. If the recent volatility of the fixed-income markets has taught us anything, it is that bond investors are easily spooked, and can sell in a panic, in just the same way that stock market investors do. It may be hard to see beyond the volatility of the markets at the moment, but in the long term, it offers plenty of investment opportunities," explains Ian Edmonds, a fund manager at Western Asset.

Saving accounts

Once the star product for Spanish savers, lower and lower interest rates are making it harder and harder to gain a return from putting money away. A year ago the Bank of Spain imposed limits on paying interest bonuses on deposits of less than a year. Investors who want to keep part of their money in the bank have a number of options: they can look for foreign banks that aren't affected by the Bank of Spain's rules, or for 13-month accounts. Another option is investment funds that put your money into saving accounts, and enjoy the flexibility that comes from a shared investment, although it is worth taking a look at the management commissions, which can eat up a significant part of your returns.

"We recommend putting as little money as possible into savings accounts. The age of returns above interest rates is reaching its end. Investors must accept the risk that by putting their money into a bank they are assuming part of the bank's balance: never put more than 100,000 euros into a savings account in the same bank, the maximum amount covered by the Guarantee Fund. There are also few tax advantages to having your money in the bank," says Juan y Seva.


The property market looks to be stabilizing. House prices rose in Spain by 0.7 percent in the third quarter of this year compared to the same period in 2012, bringing an end to a downward spiral that had begun in 2010. But this improvement should not be seen as the beginning of hikes in house prices: most increases have taken place on the coast, and the main buyers are institutional investors.

Spain still has a huge stock of unsold, new properties: reducing it could drive prices down, says Ignacio Cantos, head of investment at ATL Capital. "We are seeing two phenomena in the property market: on the one hand there is a growing segment of rental properties, which means less homes on sale, and that is keeping prices stable. On the other hand, investors can see that the prices of houses in premium areas are once again offering potential."

Bankinter last week published a report on the property market, saying: "These assets are becoming more and more attractive to international investors, even though house sales are continuing to fall, there is little new development taking place, and prices are still falling." The bank makes the following observation: "The property landscape has changed recently, and the supply and demand figures prior to the bubble bursting will not be seen any time soon." That said, the fact that prices have stopped falling in Barcelona and Madrid and that sales are picking up could well be the precursor, says the bank, "to a new phase of incipient recovery."

Recomendaciones EL PAÍS
Recomendaciones EL PAÍS