As 2014 starts to gather momentum we have spent a great deal of time looking at last year as well as preparing for the next 12 months. Despite a number of scares during 2013 we avoided any of the major corrections in equity markets that have so characterised the previous five years. Each of these corrections has been accompanied by a large amount of investor worry and, as a consequence, there was little hope or faith attached to the rally in most stock markets in 2013.
A lot of our own work points to ongoing high levels of scepticism about economic growth and enduring rises in stock markets. With enthusiasm for the bullish case for either economic activities or shares advancing so muted, it remains very much the case that a bull market is climbing a wall of worry. Indeed, we are not proclaiming an outburst of optimism ourselves for either equities or economies, just that 2014 will see a mirror of 2013, namely that the economic and financial news won’t be as bad as the worst expectations of many commentators and investors and this will allow a large number of equities and other assets to rise in price.
Despite living in a totally different world from the last decade, and in particular the run-up to the financial collapse of 2008, investors remain fixated on many of the problems prevalent during that time. They are reluctant to acknowledge the many changes that have occurred and the lessons bankers, corporates and policy makers have learnt from that experience. In particular, the importance of keeping credit flowing throughout the economy has been realised by swathes of policy makers and we take great encouragement from this development.
The notable feature of 2013 has been the divergent performance between the equity markets in the developed and developing world. The markets in the West regard the lack of threats in 2013 as encouraging and are taking the view that global growth is likely to pick up, while inflation remains low. All in all, the consensus outlook regarding Western markets is that the outlook appears balanced and better. As stated above, the key determinant of the success of investments is the overall rate of improvement in news-flow, not the need for outstanding news itself. The healing in the economies and financial systems is the reason for the rally in 2013.
Regarding the Emerging Markets, with our long-term bias towards Asia remaining our favourite call for 2014, we find it right that investors will again focus on the key areas of the advantage enjoyed via demographics, education, competitiveness and domestic savings. We understand the issues surrounding administrative red-tape in a number of the larger Emerging countries and also the lower quality of infrastructure but we do feel that these countries, and many more, will heed the demands of Western investors regarding the need for reform. Very few of the developing countries are anywhere near full-scale maturity in terms of economic achievements and this should be remembered despite the disappointing equity returns in 2012 and 2013.
Whilst the focus for most of 2013 has been the “tapering” issue in America and the constant announcements by members of the US Monetary Authorities about its proximity, we feel this has blinded investors at times to the outlook for Bond markets and sentiment will swing back towards a benign outlook for fixed income – again, we do not believe the worst expectations of many commentators will be seen. We are pleased with the strong yields paid by the Bond funds we invest in and delighted with the abilities of managers to cope with the comments and initiatives from the various central bankers.
With Western economic news remaining positive overall, worst expectations and forecasts are not being seen, and there is a growing perception that 2014 will see a relatively calm time. We are scouring the various newspapers and strategy notes for the next obvious shock. With Global growth as a whole likely to gather steam, and the policy actions to fight-off deflationary forces, investors have clearly welcomed this combination of events. It’s not to say 2014 does not contain the prospects of a whole raft of policy debates around the outlook for currencies, commodities, residential property and the actual timing of a significant reduction of Quantitative Easing (QE) in North America and maybe “the end of QE” debate spreading to the UK and Japan by the end of 2014. By way of an aside, we continue to believe the Federal Reserve in the US will withdraw its huge liquidity injections at a far slower pace than consensus expectations. But to us none of these is likely to derail the ongoing recovery in investor sentiment and economic healing seen in 2013.
To conclude, we are expecting additional, and very favourable, support for stock markets, relating to ongoing levels of monetary liquidity, favourable corporate earnings prospects and additional boosts relating to share buybacks, strong dividend increases and a noticeable pick-up in Merger and Acquisition activity. Investors have significantly reduced their allocations to equities over the last 14 years and we would anticipate this change reversing itself and investors using their cash balances to buy shares at an ever increasing pace.
We continue to find well-managed new funds and companies to invest in. The signs remain favourable that Central Banks and Governments are focused on preventing volatility and turbulence in stock markets and their domestic economies. Investors remain averse to aggressive speculation and this is encouraging as we see signs of true stability. A prospect which is encouraging for the long-term. Whilst Emerging Markets have had domestic disruptions in 2013 we see more encouraging signs for 2014 – with growth returning and aiding the steady recovery in the Western World, in particular Asia with its exposure to exports to the USA.
Our equity investments remain centred on recovering consumer confidence in the Western World, marginal but improving investor appetite for risk amongst investors at the margin, consumption in the Emerging Markets where consumer expenditure is coming off a low base, technology and its long-term secular impact on driving sales in developed and developing countries and enhancing business efficiency. Finally we remain advocates of the continuation of the global industrial boom of the last ten years.