From what we have seen and read so far, generally the outlook for 2014 is reasonably optimistic, driven by improving growth in developed markets and no further slowdown in emerging markets.
However, predicting the trajectory for economies is a little easier than doing the same for markets. I don’t remember many predictions at the start of 2013 for the US to be up close to 30 per cent. Likewise few predicted a 50 per cent rise for Japan.
Markets look forward, hence what we have seen in 2013 is investors looking to a brighter future and driving up equity prices across the US, Japan and Europe. The poor returns this year for Asia and emerging markets implies a weak outlook. This could be an opportunity, as the outlook actually looks reasonable.
This has been no ordinary year, however, given the continuing role of central banks in underpinning markets through quantitative easing (QE). Few would have predicted the calm that has remained in the eurozone in spite of the odd wobble from Italy and Cyprus. It would seem that politics has been put on hold – in part due to the elections in Germany and the lack of pressure from bond markets, thanks to the invisible hand of the European Central Bank and “whatever it takes” from its president Mario Draghi.
Next year, when European banks must face up to recapitalisations and Greece and Portugal to a further round of bailouts, may be more troublesome. The recovery in Europe remains fragile in spite of the rebound in confidence. To be underweight Europe is now a contrarian trade but may well be fruitful in 2014.
The biggest hiccup in markets this year came in May when Federal Reserve chairman Ben Bernanke hinted at the prospect of tapering of QE in the near future. This caused a de facto rise in money market rates, slowing the US housing market and causing a flight of capital out of emerging markets towards the prospect of higher rates in the US.
The Fed never did taper but this remains likely in the coming months. US politics have been a negative influence on sentiment for most of the year thanks to the ongoing issues over the debt ceiling and government budgets. This issue will return in 2014 but there is some hope that, in a year of mid-term elections, politicians will want to be seen to be working together to bring about a deal in spite of the extremely polarised nature of US politics.
In the UK, the economic recovery has taken hold this year. Looking back this has been something of a surprise given there was talk of ‘triple-dip’ recessions. In the end growth has been strong and even the double dip has been erased from history thanks to upward growth revisions.
The housing market has been the driver of this growth, improving consumer confidence. One big uncertainty is the Scottish independence referendum: a constitutional crisis would certainly lead to a slowdown given the uncertainty it would bring.
Looking into 2014, it would appear that overall there are fewer tail risks to be concerned with than recent years. There will no doubt be a few surprises, but provided growth continues to improve and is supportive of earnings, markets can make progress.
Gary Potter is co-head of multi-manager at F&C Investments
