IT’S A new year, and I received the most important present just before Christmas. In 2014, I will never again have to ask whether the US Federal Reserve will start tapering its asset purchase programme. The relief of that single fact cannot be overestimated, and I would like to personally thank Ben Bernanke and the rest of the Federal Open Market Committee for changing the narrative.
However, that doesn’t mean there aren’t lots of other questions.
Top of the list, after a stellar year for stocks, is what happens now? 2013 witnessed a huge revaluation and a lot of future good news has been priced in. To justify more major upside moves for equities, there must now be some real earnings growth. The major companies have been able to generate greater profits by concentrating on the cost side, benefiting in particular from three areas: restructuring, very low cost of borrowing, and very small increments in wages. On the last two, it’s hard to see anything other than a reversal. The best has been had.
The FTSE 100, meanwhile, was a relative laggard in 2013 compared to other global indices. It was up 15 per cent, while Germany’s Dax was up 26 per cent and the S&P 500 up nearly 30 per cent. The UK was hurt by the preponderance of mining stocks listed in London. The resource sector was the worst performer in Europe, down 14 per cent, compared to gains of around 35 per cent for the best: autos. Miners were hit by weaker demand, particularly from China, and a consequent oversupply. Gold stocks (down 29 per cent) were also hit by the precious metal having its worst year since 1981.
But will anything change in 2014? Already, Chinese purchasing managers’ index data looks weaker than expected and investor George Soros says the country’s prospects are his number one concern. The consensus view is that the developed world is once again where investors should position money.
There’s a general view that, as US growth continues to improve and the Fed completes its tapering, yields will rise and the dollar will strengthen – hurting emerging market currencies and flows. But a lot of bad news has been priced in, and emerging markets might just provide the upside surprise.
As for sterling, it has been a major outperformer, as has the UK economy. Right now, its strength is probably beneficial. A weaker currency hasn’t helped exports as much as many hoped, but it did contribute to higher inflation and the consequent squeeze on real incomes. A stronger pound will help inflation, enabling the Bank of England to keep rates lower for longer. Mark Carney wants to ensure a full recovery gets embedded; the current price of sterling should be welcome.
Ross Westgate co-presents CNBC’s Worldwide Exchange. @rosswestgate