While it is no surprise that the possibility of the Fed tapering its stimulus programme remains the main wild card to continued recovery, around 60 per cent of those surveyed think developed market equities will be the most profitable asset class over the next three months. Further, more than 50 per cent think equity returns will exceed 5 per cent in this time frame. Meanwhile, 25 per cent expect a rotation from US equities, and a further 25 per cent see rotation from cash to riskier assets. Barclays’s US economics team sees March 2014 as the most likely taper start date; however, it thinks the Fed will be relatively quick to wind down support measures, with September 2014 the most likely end date.
So if most investors are bullish on developed market equities, what should they be aware of in emerging markets?
Bank of America Merrill Lynch (BoAML) has mapped out some of the main hazards facing emerging markets. At the top of its list is a downside risk from US inflation, which it says “is probably the most important risk the market is underpricing”. BoAML’s research team thinks US inflation will stay around current levels, while US real GDP growth accelerates to 2.6 per cent in 2014. At the same time, US data could positively surprise, benefitting emerging markets through trade. However, US and emerging market yield curves could be impacted if the output gap narrows by more than expected because of lower growth or higher joblessness, causing US inflation to increase at a quicker rate.
BoAML also highlights an upside risk from European inflation, saying central and eastern European currencies and yields would move lower (though this could provide a trading opportunity).
This week sees the last rate decisions of 2013 from the Bank of England and the European Central Bank (ECB). While no change is expected from either, focus remains on the ECB and whether Mario Draghi decides to support banks with alternative tools. While another Long Term Refinancing Operation has been discussed, and some speculate whether US style QE is needed, it seems the market got ahead of itself in reading too much into some of Draghi’s last comments on the potential of negative deposit rates.
Louisa Bojesen is the anchor of CNBC’s European Closing Bell. Follow Louisa on Twitter: @louisabojesen