David B. Mazza, Head of Research, SPDR ETFs, State Street Global Advisors authored a report titled “2014 ETF & Investment Outlook” published earlier this week. In the report, Mazza provides a relatively rosy economic outlook, both in the U.S. and globally, and says selected sectors of equities are likely to perform well in the growth-oriented macroeconomic climate he projects for 2014.
Real economic growth returns
Mazza is projecting that overall global economic growth will increase from 3% in 2013 to 3.6% in 2014. U.S. growth is anticipated to quicken from an anemic 1.6% to a more respectable 2.8%, and anticipates the Eurozone will finally inch back into positive economic growth as they improve from -0.3% growth in 2013 to 0.8% in 2014. Specifically, the UK is projected to improve from 1.2% growth to 2.0%, Germany to accelerate from .6% to 1.7% and laggard France to move forward from a mere 0.2% growth to around 0.9% growth in 2014.
ETF market grew in 2013
Given the global bull run in equities in 2013, it’s not too surprising the ETF market grew by $196.4 billion globally. This strong growth can be attributed both to improving macroeconomics among developed nations leading to equity appreciation and the low yields of other investment alternatives. Large cap and broad market ETFs received the greatest inflows at around $50 billion each, whereas the precious metals category was hands-down the most sold with over $36.9 billion of outflows for the year. Concerns about rising interest rates toward the end of 2013 also led the utilities sector to end up with $1.2 billion in outflows for the year.
Sector selection ETF strategy for 2014
State Street and Mazza say that careful selection of well-managed ETFs in the right sectors could lead investors to profits in 2014. “While equity markets are no longer screamingly inexpensive, certain segments do offer investors the ability to take advantage of attractive fundamentals.”
Consider selected emerging markets
Mazza also says that a number of emerging markets are oversold, and that structural imbalances will create opportunities in selected emerging market sector ETFs. “Investors have largely shunned emerging markets over the past year, as their competitive advantages relative to developed markets appeared to be narrowing and profitability has narrowed. Looking ahead, investors will be well served by taking a more nuanced approach to emerging markets. For example, due to structural imbalances, companies in certain regions will likely exhibit divergences in return streams. To harness this, investors may want to look for active strategies that can take advantage of these opportunities and make discrete allocations to smaller countries and small cap companies that will benefit from increases in domestic consumption.”