21 January 2014
The author of this article is Stefan Van Geyt, who is group chief investment officer at KBL European Private Bankers, which is headquartered in Luxembourg. The statements and views expressed in this document are those of the author as of the date of this article and are subject to change. This article is also of a general nature and does not constitute legal, accounting, tax or investment advice.
Before considering international macroeconomic and investment trends in 2014, it is worth pausing to reflect on historical global growth patterns over the much longer term – covering, for instance, the past half-century.
Consider that, between 1961-2012, real global gross domestic product expanded every single year – except in 2008, at the height of the Great Recession – increasing by an annual average of 3.6 per cent. In the long term, global contraction is an outlier.
Over that same expansionary period, the Asia-Pacific region far outpaced the rest of the world: with average annual GDP growth of 5.7 per cent over that half-century, Asia-Pacific grew more than twice as fast as Europe (2.5 per cent) and far faster than both the Americas (3.3 per cent) and Africa (3.8 per cent). Decade by decade over the last 50 years, the East has been ascendant.
Fast forward to today.
Unsurprisingly, given historical trends, the global economy is expected to expand in 2014, with the IMF currently estimating 3.6 per cent growth next year, compared to approximately 3 per cent in each of the past two years.
Importantly, over the same period, the growth gap between emerging and developed economies will narrow, primarily as a consequence of curtailed expansion in markets like China, India and Brazil.
Another reason why that growth gap will narrow is that the world’s largest economy, the US, appears set to enjoy sustained growth as consumer confidence recovers and the country profits from an acceleration of domestic crude oil production.
The outlook for Europe remains muted by comparison. While the double-dip recession has ended, the economy continues to be dragged down by ongoing challenges in the periphery, where improvements are only now beginning to materialise. As a consequence, eurozone growth is not likely to exceed 1-1.5 per cent in 2014 as the Continent crawls out of recession. As well, while a major change in eurozone credit growth figures is unlikely, we have probably seen the trough.
The recovery in Japan should continue, supported by the easing of monetary policy, boosting of stimulus and reform of key sectors. These aggressive Abenomic policies will lead to further upside potential for the country’s equity markets – but at a likely cost to the value of the yen.
Elsewhere in Asia-Pacific, China will remain the driver of global growth (with GDP expansion forecast in excess of 7 per cent), but will need to rebalance towards consumption.
With the exception of the world’s second-largest economy, the outlook for emerging markets is uncertain: Brazil, in particular, remains stagnant, and forecasts for the rest of Latin America continue to be revised downwards. Meanwhile, much of the Middle East is still struggling to achieve macroeconomic stability.
Nevertheless, as history instructs us, we remain firmly optimistic about the international outlook in 2014.
So what does this mean for the globally minded investor?
In this period of positive market returns, despite muted GDP growth, the sustained high level of price-to-earnings ratios makes clear the buoyant mood among investors. Valuations are no longer a bargain, but there is little reason to believe that current positive market trends will be reversed, likely making equities the most attractive asset class in 2014, especially compared to the low or negative returns on other asset classes.
In line with the broader macroeconomic outlook, we have a preference for developed markets - including Europe, where earnings are poised to grow again after years of downgrades - over emerging ones, with an exception for China. In the Far East, the investment case for Japan is also likely to remain valid next year. On the currency front, the US dollar should strengthen over the coming 12-month period. We may also witness an interesting de-correlation play for euro-based investors.
We are already starting to see the first real signs of mutual fund inflows in equity funds, following years of inflows in bond funds. Indeed, the outlook for the bond market is mixed, and could be further impacted by the results of European Central Bank stress tests and the prospect of Federal Reserve tapering. Therefore, long rates will likely be under upward pressure.
Today’s investors are now demanding higher yields from long-dated bonds, and favoring the short end; it appears that we are finally approaching the end of the 30-year bull market in long bonds. That’s why investors are likely to continue to turn next year to corporate, high-yield and convertible bonds – with the latter continuing to boom thanks to the US stock market rally and the linked opportunity to profit from upside volatility.
Meanwhile, US housing are expected to top the 1-million mark for the first time since 2007 - supporting increased job creation and an improved overall picture for the property market. That is just one reason why real estate – as an alternative asset class, through the listed sector - may prove to be highly attractive next year, even in an environment of rising rates.
In 2014, as the global economy continues its inexorable forward movement, the perennial challenge for investors will be to identify how such growth will impact the market. While no one can predict such fluctuations with certainty, we remain convinced that taking the long view is always the right place to start.
- Wealth Briefing