Brewin Dolphin expert gazes into his crystal ball
What does 2014 hold for investors? In 2014 we expect the FTSE to reach 7,400; the S&P to 1,900; and the Nikkei to breach 18,000.
Equities become the asset class du jour
We see equities becoming the asset class du jour for investors. This is not built on a universal cyclical recovery, but rather by falling prices which we have been talking about all year.
Policy makers and investors will come to recognise that extreme measures are required to combat deflation, and that in such circumstances the prospects for equities are extremely robust.
Inflationary pressure to remain weak throughout 2014
Despite better economic news weak prices will prevail in peripheral Europe. Spain and Greece will flirt with deflation throughout the year.
Italy will see higher sales taxes holding price gains. Yet Germany however should see inflation driving towards two percent, as tighter labour markets and the prospect of the minimum wage mean consumption starts picking up.
Monetary policy will become easier as the rise of extreme parties pushes non-core countries to insist that Europe’s one size monetary policy is made to fit all.
With the UK on the up, inflation likely to head down
We see UK GDP exceeding three percent in 2014. The revitalisation of the financial markets and corporate deal-making mean a recovery in service sector productivity.
Inflation here, too, is likely to trend downwards, touching 1.5 percent by the year end.
The Fed puts away its cheque book
The Federal Reserve will cease asset purchases next year given the strength of the recovery underway and the boost still to come from a recovery in construction and lower fuel bills.
Positive real income growth mean the US could be raising interest rates at its October meeting.
US mid-term elections – who will feel the pain?
The US mid-term elections present an historic opportunity for President Obama to play out the remaining two years of his tenure with both houses of Congress in Democratic hands.
Despite investor focus on the Republican’s disastrous handling of the US shutdown the chance for gains in the House is limited by the low number of tight contests.
Meanwhile, the President’s woeful implementation of the Affordable Care Act, while further from investors’ consciences, is front and centre for US voters and Democratic senators will feel the pain come November.
The sitting President’s party tends to suffer in the mid-terms and we suspect the houses of congress will be allied against the President not for him by the end of 2014.
Emerging markets will have their time – but this is not it
Rising transportation costs, deteriorating energy competitiveness and institutional weakness means the year end’s events in Thailand and the Ukraine will likely remain themes for the new year.
Investors should focus on the more developed emerging markets where intellectual property rights are entrenched – markets like Korea should rebound well from their recent slowdown.
October’s elections in Brazil will be a major source of uncertainty with the World Cup looking likely to prove a national embarrassment having already been perceived as a wasteful pit of vested interests by ordinary Brazilians.
Hope comes to India
Patience with India’s ruling Congress party looks to have been exhausted. May’s elections will also see a change of government there which should pave the way for market-friendly reforms.
Investors should capitalise on Japan’s extraordinary inflationary policies
The yen is falling to 120 to the dollar; whether it gets there in 2014 remains to be seen but we conservatively estimate that these extraordinary policies pursuing inflation remain potent forces of value creation for investors.
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