Mark Burgess, chief investment officer at Threadneedle Investments, says there are three issues for investors to consider for the year ahead.
These are the growth outlook, what a normalised yield curve means for emerging markets, and whether economic growth can drive corporate profit growth. He gives a global outlook that relates to Australian investors.
Is growth going to become embedded in the developed world?
“In both the US and UK, economic growth is gaining momentum. In the US, the impact of last year’s fiscal drag is behind us, growth is building and job creation appears robust. The financial system is working with a strongly capitalised banking system lending to the real economy.
“One could argue that with QE still very evident we should expect no less (stimulus is running at $75bn per month). Nonetheless the US economy looks well placed for 2014 and beyond. UK growth is also taking hold; again private sector job creation is strong, leading indicators are all signalling significant expansion, and the housing market in the south east is particularly buoyant."
Will tapering, rising bond yields and a stronger US dollar challenge the emerging markets in the way that it did last summer?
“Last year’s car crash in EM debt and equities could be a pre-cursor to a full-blown motorway pile up later this year. Deficit countries more dependent on external financing have remained under pressure since then.
“Both the equity and debt markets were standout underperformers last year, although equities had a bounce in the second half. The regions’ woes have not been helped by the new Chinese government appearing to want to contain the explosive credit formation facilitated by the shadow banking sector.
“This has further undermined investor confidence, as has the prospect of a stronger dollar. Nonetheless, if the region can withstand tighter (or at least less loose) US monetary policy, then real value will begin to appear. Bond yields are significantly higher, equity PE ratios are much lower than the developed world and at some stage the region will become attractive.
“For now though we need to see evidence of stability before considering increasing our exposure."
Prospects for corporate profits?
"Equity markets have clearly performed extraordinarily well over the last few years… For equity markets to progress further we need corporate profit growth to take up the running – it’s unlikely equities can go much further without that happening.
“Returning then to our first question, if global growth takes hold there is every reason to believe the backdrop for corporate profit growth will be provided, although we will need to be mindful of the impact of falling unemployment on margins given current elevated levels.
“There is one final issue to consider. We are nearly six years away from the global financial crisis (although it feels much closer in investors’ memories). Looking at past cycles, history would suggest we are now closer to the next crisis than the last one. Let’s hope that proves not to be the case!”