Register Log-in Investor Type

Research

Macro Comment – A positive close to a vintage year

A positive close to a vintage year

  ‘Its time the Fed moved away from ….an artificial world and allowed the economy to stand on its own. The process of getting back to more traditional definitions of ‘normal’ interest rates and economic activity will pose new challenges for investors, businesses, consumers and policy makers alike’.

Financial Times 18 December 2013

For financial markets, the final quarter of 2013 largely followed the pattern of the year as a whole:

Equities performed well, with the 6% gain in the FTSE All World Index, capping a vintage year which has seen many leading indices reach new all-time highs. In the UK, the blue-chip FTSE 100 Index rose 4.4%, but this index continued to be outpaced by indices representing medium-sized and smaller companies. Among overseas markets, the buoyancy of returns from the US, Europe and Japan contrasted sharply with the lacklustre performance of many emerging markets.

It has been a difficult quarter for bonds. Despite lower inflation and soothing words on interest rates from central banks, returns from government bonds were generally negative (-1.3% for UK gilts), with yields rising to compensate for increasing uncertainty over prospects. Returns from corporate bonds were adversely impacted by similar pressures.

Gold was thoroughly out of favour: persistent selling resulting in a10% fall to $1196 per ounce.

The two dominant influences over investor behaviour were increasing optimism over the outlook for leading developed economies and continuing massive support from central banks. The surprise decision by the US Federal Reserve (Fed) on 18 September to delay the reduction (or ‘tapering’) of its $85 billion per month bond purchase programme provided a particular boost to investor confidence. This was followed in December by the announcement that though tapering would begin in January, the pill would be sugared by the strengthening of the Fed’s commitment to low interest rates.

Outlook for 2014

Five years on since the start the global financial crisis and the world economy finally appears to be on the mend. Optimism is focused on leading developed nations, particularly the US, the UK and Japan, where growth predictions have recently been upgraded. By contrast, the view on emerging countries, formerly the great drivers of global expansion, is distinctly more cautious.

In 2014 much attention will be focused on companies, particularly on their willingness to devote more of their abundant cash reserves to capital investment.

Though the economic outlook is more promising, central banks remain strongly committed to maintaining ultra-low interest rates. However, the Fed will need to handle its tapering policy with great care so as to avoiding spooking investors.

After a rewarding year (and nearly five years of rising share prices) investor confidence is high with most commentators predicting further gains for equities in 2014 and a modest rise in bond yields. Sceptics might regard this as evidence of complacency and a blithe dismissal of potential risks. However, equity valuations, though no longer at bargain basement levels, remain attractive particularly in comparison to low returns on cash.

John Hatherly, 2 January 2014

Please review our cookie, privacy & data protection and terms and conditions policies and, if you accept, please select your place of residence and whether you are a private or professional investor.

You live in…

You are a…