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Quantitative easing, smart growth in Asia and potential deflation in the Eurozone will be the topics to watch in 2014, says Manulife in its annual year-ahead report.

“Amid economic and political uncertainties, a heavily-debated potential QE taper, rising rates in some countries and plummeting rates in others, 2014 has the makings of another eventful year for asset managers and their clients,” said Warren Thomson, chairman and CEO, Manulife Asset Management.

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A stronger job market could prompt the Fed to start tapering its bond buying program between December and March, with March being most likely, say Manulife’s economists. If the Fed tapers without causing a dramatic increase in short-term interest rates, it may signal a good environment for U.S. equities. The impact of an eventual taper on Asia’s fixed income markets will be much more muted than earlier in 2013.

The macro-economic environment will be fairly positive in 2014, thanks to slightly better news coming out of developed markets including Japan, though it all continues to hinge on a still-uncertain U.S. recovery.

Read: Equities to keep climbing in 2014, says Russell

To the equities rally going in 2014 corporate earnings will have to be strong. Equity market returns in 2013 have been robust but driven by more than the underlying fundamentals of individual companies. Double-digit earnings growth year-over-year are a necessary driver of potentially low double-digit return for equities in 2014, says the report.

Asia still offers significant opportunities for investors who do their research. There are particular opportunities in the export-oriented North Asian equity markets and within fixed income, in low investment grade and strong non-investment grade credits.

Investors will be watching China to see if it can maintain its GDP growth rates and continue with its reform agenda. The Chinese yen’s low sensitivity to U.S. market moves will continue to keep it in good stead next year compared to other Asian currencies Manulife states in its report.

Read: New data suggest economy better than expected

The European Central Bank cut rates in November 2013 and now talk is about negative real rates in the Eurozone in 2014. This will be needed to stimulate the fragile economic recovery. The European banking sector could be key to unlocking investor interest in European equities again and positive news from the European Banking Authority’s asset quality review could be seen by global investors as a genuine catalyst to re-enter European equity markets.

Over the next five years, returns for equities and non-investment grade bonds, including high yield and floating rate loans, will outpace traditional bonds in the next five years.

Read the whole report here.

Originally published on Advisor.ca

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