NEW YORK -- The most likely 2014 investment scenario? A “tapered world” with modest equity market returns, according to Ricardo Santamaria, investment strategist for the Mark. T. Curtis Group of Morgan Stanley/Graystone Consulting.

The Federal Reserve Board’s policy of gradually slowing, or tapering, its purchases of Treasuries and mortgage securities to keep interest rates low, will also likely lead to a moderate interest rate increase by year-end, said Santamaria, speaking here at IMCA’s 2014 Consultants Conference. In addition, Graystone expects stock prices in 2014 to be driven not so much by a bull market as by company-specific earnings and dividends.


Two other investment scenarios are possible, though not probable, Santamaria said: global growth or a bursting economic bubble.

Global growth would be characterized by a rally of risk assets and continued outperformance by equities with expanding valuation multiples and inflation potential.

A bubble burst would bring expanding global recession, negative absolute returns and a flight to safety.


Fixed income, Sanatamaria said, was the “epicenter” of risk for clients, followed by tapering, deflation, taxes, geopolitical events and inflation.

While investment risk has historically been defined quantitatively through statistics such as standard deviation and beta, Santamaria noted that they only reflect past performance. He urged advisors to also “look forward” to identify future outcomes and risks that can lead “not only to significant portfolio impairment, but consequences for your client’s standard of living.”


Equities in developed markets was Graystone’s dominant investment theme this year, according to Santamaria, followed by master limited partnerships, liquid alternatives – “to minimize standard deviation” – municipal bonds and short-duration fixed income.

For strategic long-term portfolio construction, Graystone is emphasizing global core equity holdings, Sanatamaria said. Liquid hedged strategies were seen as key for a “tapered world” scenario portfolio construction, while a bubble-bursting scenario called for cash and fixed income allocations.

Allocations in a global growth scenario would tilt toward MLPS, REITS, natural resources and equity in emerging and developed markets, Santamaria added.

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