Five reasons for investors to be cheerful in 2014

1st January 2014

At Mindful Money, we are always keen to alert investors to the risks of stockmarket investment, but the outlook going into 2014 is – whisper it – actually quite positive. So in the spirit of embracing the New Year with optimism, Cherry Reynard looks at five reasons to be cheerful about global stock markets:

1) Economic growth is accelerating – Estimates for economic growth in the major economies are being revised higher. In the UK, for example, economic growth for the third quarter was pushed up to 0.8% as reports “The revisions mean that GDP is now 2% below its pre-crisis peak, rather than the 2.5% previously thought.”

And it’s not just the UK, other major markets are also seen growth estimates moved higher. For example, in the US – as Reuters reports – the economy grew is at its fastest pace in almost two years in the third quarter. Certainly there are laggards among the major economies – France, for example – but the turnaround in countries such as Japan provides plenty of compensation as  ABCnews reports.

2) Crucially, inflation appears to be under control… – the big risk in the current climate would be that higher economic growth forces policymakers to raise rates, which would in turn dent economic growth. However, although there are still expectations of higher inflation in the future, there are few signs of inflationary pressure in the short-term as the Bondvigilantes blog shows though most countries including the UK see higher inflation over five years.

Thomas Becket, chief investment officer at Psigma Investment Management, says: “If interest rates remain ultra-low and monetary policy remains very loose, this will primarily be because the world’s central bankers are comfortable with the outlook for inflation. Indeed, one of the arguments in favour of supportive policy is the fact that inflation rates are falling across the world.”

3) …which means interest rates are likely to remain low. Certainly there is tapering and that is already having an impact on government bond yields – US treasuries tipped over the 3% market during the holiday period – but the Federal Reserve is taking a slowly, slowly approach and an actual rise in rates still appears to be some way off.

Kevin Doran, senior fund manager at Brown Shipley, says: “Mark Carney has promised not to consider an interest rate hike until unemployment falls to seven percent or inflation takes off – and possibly holding rates even if these events do happen. Carney has been at pains to stress that reaching this target does not trigger an automatic rate rise and we suspect the target would simply be lowered if reached. Therefore, we don’t expect anything to happen until mid-2015 at the earliest.

“With a General Election scheduled for May 2015 the Government does not want to take steam out of the recovering economy and this desire is not lost on Governor Carney who was hand-picked by the Chancellor, George Osborne.”

4) There are still opportunities to find value – some parts of the stock market have seen strong rallies, but there remain individual regions and sectors that still offer value. For example, many emerging markets have not participated in this year’s rally and the average fund in the IMA Global Emerging Markets sector is down 4.4%. This has left valuations attractive and, many believe, created opportunities.

Jeff Chowdhry, head of emerging market equities at F&C Investments, says: “The perception of a cyclical downturn in emerging markets has pushed equity valuations down to very cheap levels. It has also brought about a sharp depreciation in a number of emerging market currencies. This represents an excellent buying opportunity if you believe, as we do, that the long-term emerging market story remains intact.

“But it is imperative that investors are selective. The sectors that fuelled the first emerging markets boom probably won’t be driving the next. Caution needs to be exercised, for example, with commodity companies. China’s determination to restructure has seen its demand for raw materials slide, and this has contributed to the downturn seen in the big producer nations such as Brazil, South Africa and Russia.”

Equally, in the UK, large caps have been left behind as small and mid cap stocks have rallied. Alex Wright, portfolio manager of Fidelity Special Values trust, says: “The FTSE 250 and FTSE Small Cap indices are now trading at premiums to their 15-year price to earnings multiple averages. The FTSE 100 still looks cheap compared to historical averages, and this has proved a fertile space for idea generation recently.”

5) Corporate earnings are set to increase – Corporate earnings in most of the major markets have been revised lower over the course of 2013 and are now more realistic. The improving economic backdrop should allow companies to grow earnings faster, which in turn, will drive share price growth. Becket says: “Given that the global economy should perform well next year, we expect revenues of global companies to increase. This sales growth, when allied with strong balance sheets, efficient operations and cheap access to debt, should lead to solid growth in corporate earnings. Some of the more optimistic expectations will probably be unfulfilled, but we believe that circa 7-9% profits growth is realistic and this should lead to respectable performance from equities.”

This all sounds good in theory, but there are signs that the experts believe it too. Research from Redmayne-Bentley’s annual internal Broker Survey showed that brokers expect the FTSE 100 to break through the 7000 point barrier and continue to soar in the New Year. Almost half (48%) said that the FTSE 100 would peak during 2014 at between 7000 and 7249 points.

That would certainly give many investors a few reasons to be cheerful.

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