AFTER a surprisingly strong 2013 in many equity markets, I am cautiously optimistic for 2014. One of the key reasons for my slight wariness is that most of the predictions I am reading at the moment are unambiguously positive. There is an unusual consensus around a generally bullish outlook for stock markets, in particular those in the developed world – and that feels a little complacent to me.
Broadly speaking, I expect the US to grind higher, as rising earnings pick up the baton from valuations, which have already expanded. There is quite a lot baked into expectations for the US recovery, however, so any signs that earnings are not coming through could trigger increased volatility.
The beginning of the Fed’s withdrawal from money printing will make the dollar relatively attractive, further bolstering the appeal of US equities. America continues to have a number of distinct advantages compared to other countries – better demographics and the shale energy revolution will provide an ongoing competitive edge.
Japan was 2013’s other big winner, and it could go further after pausing for breath in the last six months. Again, there’s a caveat. The proposed consumption tax hike in April could revive nasty memories of a similar tightening of fiscal policy in 1997, which sent the Japanese economy back into recession. Currency will provide a tailwind for Japanese shares which, thanks to the country’s export bias, benefit from a weaker yen.
These views on equity markets are fairly consensus. I differ a bit from the crowd on emerging markets, where I see potential for relatively cheap Chinese shares to finally enjoy a revival. North Asia, including Korea, Taiwan, and China, looks a better bet than the ASEAN countries further south, which are more highly-valued and, in some cases, look vulnerable to higher rates in the US. Other emerging markets such as Brazil, which are dependent on commodities, also look a bit exposed.
The divergence between financial assets and real stuff like natural resources looks like it will widen further. Commodities will continue to roll over – these trends tend to go on for many years.
I’m also a bit sceptical about the growing enthusiasm for European shares. The problems in the Eurozone are by no means fixed and the euro is too pricy for the region’s exporters.
A key feature of investment markets in 2014 is likely to be greater discrimination between the winners and losers. This will be particularly apparent in emerging markets, where those countries which are serious about addressing their structural issues with reform programmes (again including China) look the best bet.
In fact, active investment generally should begin to get an edge over passive strategies which are as flawed, to my mind, as they are popular. If markets start to discriminate between winners and losers, following a period when macro calls have been the only game in town, then stock-pickers should be able to outpace tracker funds.
The dog that didn’t bark in 2013 was the Great Rotation. I think it will remain quiet in 2014 for a number of reasons. Interest rates will stay low in line with relatively disappointing economic growth overall. Bond yields have already re-priced to sensible levels in the case of 10-year Treasuries and gilts. And there remains value in higher-yielding corporate bonds, which are rewarding investors pretty well for the extra risk compared with government bonds.
Income will continue to be highly-prized, but so too will companies that can demonstrate an ability to generate growth in a sluggish world. Inflation will remain at bay but become more front of mind as the year progresses.
2014 will be a reasonable year for investors, but not as good as 2013.
Tom Stevenson is investment director at Fidelity.