These are the financial predictions for 2014 of four Journalist and economist I hold in high esteem and whose analysis I pay keen attention to:
Linda Yueh Chief Business Correspondent of the BBC. She made her 2014 predictions here.
Financial Times long-view investment writer and former head of the flagship Lex columns , John Authers.
George Magnus, Author and Economist. His analysis is contrarian, original and insightful.
Finally, Economist and journalist for the Reuters news agency Anatole Kaletsky.
Linda Yueh Predictions
-There will be no reverberations across global markets following the Feds ‘Taper’, which will most likely finish by the end of next year.
-Emerging markets (particularly the ‘Fragile Five’ – Brazil, India, Indonesia, South Africa and Turkey) have had ample time to prepare and adjust their economies accordingly for the inevitable end of cheap money.
-Furthermore, the ‘fragile five’ have elections next year, these will all proceed smoothly.
What won’t happen
She also predicted what won’t happen in 2014:
-No return to normal growth rates, small chance of a sustainable self-sustaining recovery.
-Income rising strongly, more likely stagnation
-A substantial fall in youth unemployment
Finally, she believes China is the place to watch. Their main legislative agenda will be set out in March, there are growing concerns over how they will address the sharp rise in debt and the ‘shadow banking system’.
Federal Reserve’s Programme of quantitative easing
Information about QE can be found here.
Outgoing Chairman Ben Bernanke will Taper QE next month from $85bn per month to $75bn. They are keen to reiterate that bond buying is not on a ‘preset course’, meaning tapers are contingent on employment and inflation levels.
As a reminder, the target of zero short-term rates will stay in force until unemployment touches 6.5%, this is expected to happen until the end of 2014. The federal Reserve also kept to the door open to keeping rates at virtually zero ‘well past the time’ unemployment falls below 6.5%.
Meaning and the signal of this move: The era of easy money is coming to an end, but their commitment will almost guarantees near zero rates until the end of next year.
Bond market prediction
The secular bond market is coming to an end, in the US a large upward adjustment in long-term interest rates has most likely already happened, they doubled from 1.5% to 3% this year.
Anatole Kaletsky from Reuters highlights that an acceleration in the economy will likely hurt fixed-interest securities which in turn will create headwinds for property and equity prices. However, he points out that history shows that during economic upturns, the benefit to share valuations from a strong economy and earnings growth more than outweighs pressures from rising long-term rates.
US stock market – now the world’s most expensive market (S&P 500 trades at 20 times earnings, in comparison the dotcom peak was 34).
Europe and Asia on the other hand are priced for stagnation and will most likely outperform Wall Street.
Anatole believes Wall street is already priced for growth, as the market is a discounting mechanism, I am avoiding this market next year.
UK Stock market prediction
Shares in the FTSE 100 index has on averaged delivered 7% a year since Victorian times, an inflation beating return of 9% this year looks reasonable.
Interestingly, the solid performance is against the backdrop of a strong pound, as the majority of earnings stem from abroad, this has hampered export growth.
As for valuation, the FTSE 100 trades at around 15 times earnings, while CAPE (cyclically adjusted price to earnings ratio) is 15, in other words it is fairly priced.
My view: The current economic backdrop looks positive, valuations in Europe and Asia are attractive and the prospective returns on rival asset classes look abysmal. All told, I believe this creates a compelling long-term case for stocks.