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Spring Investment Monitor - March 2014



    At the end of last year, the situation in equity markets at least looked pretty rosy, Japan was on a roll with improving inflation, GDP growth and booming equity markets, while even the eurozone seemed a less scary place as it looked to exit recession. But fast-forward three months and the positivity is already starting to wane.

    Equities are still delivering positive returns, depending on where you are, and peripheral Europe is looking more attractive on both an equity and fixed income basis with Ireland and Portugal both returning to global debt markets.

    The good news, however, is tempered by the doom and gloom of other areas of the market and macroeconomic headwinds that could weigh on global growth in 2014.

    Emerging markets are the big drag, as far as most experts are concerned, particularly those with large current account deficits, such as Turkey who are feeling the hit of US tapering of quantitative easing and slower growth in economies such as China.

    Political issues are also filtering down into the investment markets. Russia, a key member of the Brics and emerging Europe, has already seen a hit in its markets due to the situation with the Ukraine. The MSCI Russia index has fallen 18.93 per cent since the start of the year to March 5, while the MSCI Emerging Markets index has only dropped 5.07 per cent.

    Depending on how the situation is resolved, the wider emerging markets could see a knock-on effect, not to mention commodity prices spiking given Russia’s oil and gas reserves, and the dampening of consumer confidence if the confrontation continues to escalate.

    Meanwhile the US, the driver of much of the global recovery so far, is pottering along. Almost all eyes are focused on new Federal Reserve chairwoman Janet Yellen, who highlighted her determination to push through with reforms at her recent swearing-in ceremony.

    She stated: “The economy is stronger and the financial system is sounder. We have come a long way, but we have farther to go. More work lies ahead to complete implementation of Congress’ plan for strengthening financial regulation, the Dodd-Frank Act.

    “I promise to stay focused on moving that process forward as quickly and responsibly as possible and to verify that these reforms are meeting the goal of safeguarding the financial system.”

    Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research, notes in its report ‘The Thundering Word’ that this month marks five years from the lowest point in the S&P 500 index’s second greatest bear market, when it hit just 666 on March 6 2009. This was swiftly followed by the announcement of quantitative easing programmes by the Bank of England, the Swiss National Bank and the US Federal Reserve.

    Mr Hartnett adds: “In the past five years, global equities have rallied 169 per cent, commodities are up 55 per cent and bonds are up 33 per cent. The S&P 500 index has risen 175 per cent in price terms and 206 per cent in total returns terms, an appreciation exceeded only by the Indonesian equity market over the same period. The only major assets that have depreciated have been Greek equities (-30 per cent) and the US dollar (-8 per cent).”

    In addition, he points out this bull market in equities has been built on “liquidity and pessimism, not on growth and optimism”, suggesting that continued economic growth and corporate earnings coming through to justify re-ratings could help boost the equity market further.

    “We believe the bull market is far from over. Neither inflation nor recession features in our macro base case. High corporate and investor cash levels are more visible than greed and leverage. And central bankers remain in ‘whatever it takes’ mode.”

    With political uncertainty in the East and a number of elections in emerging markets taking place this year set to add to this upheaval, the real risk seems to be macroeconomic and political factors. If markets can ride the roller coaster of those, then 2014 could be on track to match or perhaps better last year.

    Whatever the outcome is in Ukraine, the US and Japan, any investors that are looking for a quiet life may have to wait a bit longer.

    Nyree Stewart is features editor at Investment Adviser

    In this special report


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