With the start of a yet another new year, a seemingly commonly asked question is once again upon us. What’s in store for the markets this year? There’s no shortage of opinions out there, but we’ll try and shed some light on ours, take a look back on the year that was, and focus on the always important fundamentals. However, as markets are ever changing, we encourage you to become a weekly reader and follow our updates and commentary throughout the year to stay abreast of the latest news and trends in markets around the globe. That said, it’s currently all about equities, and specifically developed market equities.
It’s easy to understand this current focus because the USA had one of its best years in 2013 with the S&P index closing at its highest ever value after achieving almost 30% in gains in 2013. For investors to have achieved these gains, they would have had to invest everything at the beginning of the year and ride through all the stimulus and QE3 concerns to benefit, whereas, if you invested on a more regular basis throughout the year, say at the start of each month, the return likely achieved would be a more moderate 13%. Most of the gains were propped up by the FED stimulus, but after their decision to slowly scale back from $85 billion a month to $75 billion a month (which is so far a suitable method), it not only gives the impression that US economic data is strengthening, but still gives the FED the ability to control how and when any further reductions are made. And although most markets have started in negative territory in the first few days of the year, the indications still point to further growth throughout the year.
Over in Europe, the gains weren’t quite as high as in the US, but for the most part, Europe exceeded expectations for 2013 and unlike the US, did it with less stimulus intervention. It could be argued that perhaps we’re finally seeing the benefit of all the painful budget measures that were enacted a few years ago which caused riots and disruption. And if this is the case, this would point towards a more fundamentally sound recovery. Either way, Europe seems to be past most of the major hurdles, and although there are many more obstacles to overcome, the resilience and perseverance of European stocks look to continue into 2014. Nonetheless, investors may want to sway more towards European blue chip companies and the larger Euro-zone countries for more stability at this time.
In Asia it was a slightly different story with the Shanghai composite ending the year down almost -7% while the Hong Kong Hang Seng ended the year just about where it started. The Hong Kong Hang Seng suffered a rocky first half of 2013 and only just about recovered during the second half of the year. Our long time readers will know that since last July, China’s economic numbers have been improving and that upward trend has continued, and is expected to continue throughout 2014. China’s rebalancing in economic reforms proceeds with only minor disruptions and for the most part is evolving without weighing too much on growth expectations. Although Asia’s markets in general have lagged behind that of the US & Europe, the expectations for China are positive for 2014 and they already have higher GDP projections without needing as high levels of stimulus that the US and company are reliant on.
Speaking of stimulus, it has helped drive gold down almost 30% in 2013 and saw its first annual loss in over a decade. That gold would take such a hit in a single year was completely unexpected, but it’s obvious that investors continue to favor the heavy stimulus markets of the US and Japan for equity gains driven by stimulus measures. Don’t get us wrong, the equity markets look to continue pushing forward and the markets have hinted they can handle a minor cut in stimulus (for now), but this doesn’t change the fact that more central banks are printing money than ever before in history. Fundamentals for gold remain strong, but the markets are favoring equities and could therefore keep gold subdued for several more months. Once again, it is our opinion though that at some point, fundamentals will have to return.
For now, the trends over the past few months look to continue, meaning equities, especially developed market equities, will continue to be favored over bonds, fixed interest, commodities and gold. On the other hand, emerging markets underperformed developed stocks in 2013 and it’s unlikely this will change in the immediate future. There is however an indication of a shift despite the likelihood that it may take a while for emerging markets to bounce back and we do feel that, at their current low values, they provide a good buying opportunity and will further diversify against developed market equities. Bonds and fixed interest areas look to have stabilized but don’t appear to have much upside attraction for the longer term, especially while everyone continues to favor equities. Commodities may start to slowly climb if manufacturing and production numbers continue to improve, and if the global economy is truly on a recovery path then we should see this continue, albeit slowly. Gold may have the hardest argument going into 2014, especially over the short term, and although some may wish to allocate into other asset classes at this time (which could be prudent), we certainly wouldn’t recommend selling any gold holdings as the time will come when inflation starts to climb and the allocation back into metals will return. Until then, investors may want to look to overweight holdings in equities but should also continue to retain a balanced and diversified portfolio.
For Austen Morris Associates’ investors – talk with your advisor about any repositioning to take advantage of markets at this time. For more information about Austen Morris Associates please visit our website.
Austen Morris Associates Wealth Management & Investment Team
Co-Head of Portfolio Management