The US and Japan were 2013’s winners

This article is part of
Multi-Asset - January 2014

The US and Japan were the clear winners of 2013, with the S&P 500 and Topix indices respectively notching up 30 per cent and 25 per cent rises.

But their gains, especially in the case of the US, were at the expense of developing markets where productivity is waning, as highlighted by the 4 per cent drop in the MSCI Emerging Markets index, which has continued to tumble into 2014.

Rising labour costs are squeezing profit margins in emerging markets, most notably in China, and in turn driving the repatriation of manufacturing and services to the US.

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While China is still expected to remain supportive to global growth, professional investors are putting their faith in mature markets.

A cursory glance at fund performance in the year to January 10 perhaps highlights why, as the average global emerging market fund has plunged by 8 per cent while the global equity sector has achieved a mean return of 16 per cent.

A further reduction of the US’s massive quantitative easing stimulus may cause some wobbles but overall, the attitude to tapering appears to have become less strained. However, the investment world still is, and will be for the foreseeable future, heavily influenced by central banks.

But further economic growth is anticipated. The International Monetary Fund expects global growth in purchasing power parity terms to increase from 2.9 per cent year-on-year in 2013 to 3.6 per cent year-on-year in 2014, the highest rate of global growth since 2011.

David Coombs, head of multi-asset investments at Rathbone Unit Trust Management, says: “2014 is a year in which developed equities will remain the place to be, with the focus very much on domestic earners.”

Mr Coombs remains overweight US equities, especially domestic US, which he believes should benefit from the recovery and look much more attractive, on a valuation basis, than the ‘mega’ stocks.

But as America benefits from a slowdown in Asia, and more specifically China, the cost of raw materials has dropped back for US manufacturers. This scenario has been bolstered by falling energy prices through the availability of cheap oil and natural gas, as a result of the development of fracking. The upshot of which is that it is enabling US energy producers to tap into huge reserves at low cost notes John Chatfeild-Roberts, chief investment officer at Jupiter Asset Management. He says: “Wage inflation in China has also escalated, which combined with the energy advantage is helping US companies become considerably more competitive.

“As a result, US corporates are in good shape but they need to have the confidence to invest their cash balances, and this is definitely taking quite a time.”

Confidence is also continuing to ride high in regard to Japanese equities, where in spite of the Topix already having delivered more than 80 per cent since November 2012, sentiment says there is still value to be had as companies there have benefited from massive earnings upgrades.

Meanwhile, so-called ‘Abenomics’ – a policy of unprecedented monetary stimulus – has already impacted the real economy.