19th December 2013
Ewan McAlpine, senior client portfolio manager at Royal London Asset Management looks at why investors should neither be too bullish nor indeed overly bearish going into 2014.
In December 2012, my outlook for the market over the course of 2013 was set against the background of the ongoing search for yield in a world of austerity and low rates, deep structural issues in Europe, the US national debt (‘debt ceiling’) and the potential for slower growth in emerging markets (mainly China) being the major obstacles to a smooth and sustainable global economic recovery.
Survey data, not least in the UK, have shown a re-acceleration of activity across industry sectors, and economic data show rising growth, moderate inflation and falling unemployment – a recipe for eventual rate hikes. The search for higher yields has continued, with investment grade and sub-investment grade credit yield spreads tightening over the year. Levels of optimism in markets are such that a sustainable recovery would appear to be likely.
So what are the grounds for being less optimistic than markets are suggesting? Little progress has been made on the other issues. The situation in Europe has improved little; while the instances of sovereign debt and banking sector crises have diminished, there is a growing fear of sharp deflation. The US debt issue has only been postponed. And doubts persist over China.
Consider, therefore, three possible outcomes for the coming year:
Issues in Europe, the US and China are unlikely to be quickly and finally resolved and are only likely to be sources of volatility. Nevertheless, some stability in Europe has been reached, the debt ceiling issue is now familiar but pressing enough to be dealt with more reasonably and quickly by US law makers, and Chinese GDP growth is at least stable. So neither boom nor bust appear to be natural outcomes, leaving us with our slow but steady recovery, in an environment of moderately rising but volatile yields. However, the question of sustainability has not been answered and will be outstanding so long as the major sources of uncertainty remain.