AJ Bell's Russ Mould considers the investment outlook for various regions in 2014, as says there is no room for complacency.
American monetary policy will continue to hold the world in thrall, especially as the US Federal Reserve will have a new chairman on 1 February. The pace of any tapering of Quantitative Easing (QE) could have profound implications for equity, bond and commodity prices, as well as currencies, in developed and emerging markets. Each time the Fed floats the idea of a taper in its $85 billion-a-month QE programme, equity and bond markets alike have a tantrum, so more volatility is likely. But the Fed's surprise move to raise rates in 1994 caused only a mild correction and six-month sideways movement in markets before an epic four-year bull run began, so the lesson here is less expansive policy is not necessarily the endgame, so long as corporate earnings growth follows in due course.
Japan’s experiment with Abenomics cannot be left off anyone's radar, even if you have no exposure at all. Whether the world’s third biggest economy can finally shake off two decades of deflation may help shape economic policy in the West as well as decide whether the Nikkei 225 index can finally return to the investment mainstream 24 years after its fortunes peaked. Inflation is increasing in Japan but wage growth continues to lag, with the result Abe's personal approval ratings are on the slide for the first time since his dramatic December 2012 election victory. Abe is preparing a new fiscal stimulus package to help ameliorate the impact of April 2014's consumption tax hike, while the Bank of Japan is already hinting at increases in its quantitative easing (QE) scheme. It looks likely Japan is going to go all in and the Nikkei may respond positively but the yen could suffer as a result. Even 103 yen to the dollar is well above the 150-plus range seen in the 1990s.
The race to debase currencies continues as the US, UK, the eurozone, Switzerland and Japan, and Australia all try to talk down their currencies in a bid to generate economic growth via exports. It is impossible for everyone’s counters to fall in value at the same time, at least relative to each other, although fans of gold continue to argue fiat, or paper, money can sink relative to the precious metal as central banks continue to inflate money supply through QE printing policies. It is also interesting to see 'real' assets such as fine art, vintage cars and even thoroughbred racehorses showing strong pricing trends, as some individuals seek out returns above those on offer from cash or fixed income in more esoteric areas.
The debate between austerity and the need to invest for growth will rage on between followers of Austrian and Keynesian economic theory respectively. Latvia successfully took the hair-shirt approach after its debt-driven economic bust of 2008 while the deep downturns suffered by Portugal, Ireland, Italy, Greece and Spain (the PIIGS) have driven unemployment to awful levels and prompted cries for more expansionary fiscal policy. Ireland's emergence from its three-year bail-out this month will be a key test. Sweden successfully navigated a middle path but there are no easy solutions as the world’s debt burden is not going away and the interest payments alone could leave us with a relatively subdued recovery.
The eurozone is unlikely to remain out of the news for long. European Central Bank (ECB) president Mario Draghi's summer 2012 promise to do 'whatever it takes' to support the single currency is keeping markets at bay is working but may be put to the test once more. Portugal's general election and ongoing political chaos in Italy are both potential flashpoints. German banks are gradually winding down their exposure to Italian debt and this may mean appetite in Berlin to support Rome diminishes in lock-step with the risk posed to its own lenders. There is scope for a fresh fault line to emerge here, even if the single currency is as much a political construct as it is an economic one and the ECB and EU are likely to once more move heaven and earth to preserve it, should markets again begin to question the euro's credibility.
Investors also need to keep an eye on 'softer' issues, the information at the margin that can be every bit as important as a company's set of accounts or an inflation or GDP report – after all Joseph P. Kennedy sold all of his stocks in summer 1929, just months before the crash, after a bell-boy gave him stock tips, as the family patriarch reasoned, if the bell boy was in the market there was no-one else left to buy in after him.
In the UK company executives look to be resolute net sellers of stock in aggregate, while in the US the level of margin debt is at new record highs as more market participants use leverage. Neither is usually a good sign, while a reading of 14 on the VIX index on the Chicago Board of Options Exchange (CBOE) also suggests some investor complacency is creeping in. America's widely-watched Investor's Intelligence survey in late November reported just 14.4 per cent bears, a figure last seen in 1987 before the October crash. The one thing to be most wary of is perhaps the absence of fear itself so there is no room for complacency even if signs of improved economic momentum in the West, accommodative central bank policy and attractive equity valuations relative to Government bonds are all powerful arguments for further index gains.
Russ Mould is investment research director at AJ Bell
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