Australian investors could do worse than invest in hybrid issues next year, given the relative absence of a corporate bond market here, according to Alexander Friedman, global chief investment officer of UBS Wealth Management.
The Zurich-based executive is forecasting much lower returns from equities, both globally and locally, next year as global markets adjust to the much touted "taper" in quantitative easing.
Fears surrounding the planned taper have knocked 100 points off Australia's S&P/ASX 200 index in the last week, with a further 15-point slide predicted for today by the December expiry Share Price Index futures market. The Australian dollar is also under pressure, falling by US1.22c on Friday to US89.12c, in danger of breaching its August low of US88.95c and heading for a new four-year low.
"After annualised returns of more than 15 per cent from global equities and around 20 per cent from high-yield credit over the past five years, investors will have to revise down their return expectations," Mr Friedman said in a note that was published at the weekend.
"Economic and earnings growth have simply not kept pace," he added, noting that annual equity returns (combining capital growth and dividends) were more likely to be in the range of 7-8 per cent over the next five to seven years.
"Entering 2014, our highest tactical conviction is to be overweight risk assets, including equities and US high-yield credit (corporate bonds)."
He said the biggest risks in 2014, aside from policy errors, were US government dysfunction, the Chinese credit crunch, a reappearance of the eurozone crisis and growthless inflation in Japan.
On the positive side, he sees a relatively strong 3 per cent recovery in the US economy, modest eurozone expansion and a global economy enjoying its highest growth rate since 2012, at around 3.4 per cent.
His preferred areas for equities are the US and the eurozone, although he is underweight Swiss and British equities.
"Due to the higher weight of cyclical sectors in eurozone equities, this region should do better over the coming quarters than the more defensive Swiss and UK equities," he said.
Mr Friedman has a neutral rating on Australian equities because of what he calls "structural headwinds from the investment slowdown in the mining sector".
For fixed interest he suggests hybrids, an asset class that took a lot of criticism in late 2012 and early 2013 as ordinary shares in the big banks soared.
"Australia has no true high-yield market," he said, "so the hybrid market serves as a useful proxy.
"Hybrids give Australian clients the benefit of high yield and real return, while avoiding firms they know little about."