And the bulls appear to remain driven by liquidity: only 13% of the 235 investors polled in our Fund Manager Survey believe the global economy will grow above trend in 2014 versus 84% who believe it will be below trend.
But where’s the growth?
We think stronger growth, perhaps much stronger US growth, will be the investor surprise in the next 12 month for three reasons:
First, successful asset price reflation (and other stimuli): the US economy has significant monetary stimulus, a booming housing market, an inexpensive dollar, record corporate cash balances, and increasing energy independence…if the US economy does not significantly accelerate in coming quarters, we think it is difficult to say when it ever will.
Second, lower fiscal drag: Our economics team estimates that the impact of the fiscal drag on US growth to be 1.5pp this year, but will slow to 0.5pp next year, as GDP growth accelerates from 1.5% in 2013 to 2.7% in 2014.
Third, lower banking drag: BAC lending to large corporations appears to be accelerating and now growing at a double-digit pace; lending to small businesses is now positive year-on-year for the first time since May 2008.
We continue to believe that asset allocators should reduce risk allocations only once the consensus believes in sustained economic growth which in turn allows the Fed to reduce liquidity (tapering) and later raise interest rates (tightening).
Tweeting the top
The dollar, US/EU high yield bonds and extreme value in equities (eurozone, Japan, US/UK/China banks) remain our favoured long positions in the journey to a potential market top. We think real estate is fast becoming the new safe haven asset worldwide and the combination of low historic rates and improving labour markets is likely to prolong asset-price inflation in housing in many parts of the world in coming quarters.
For more conservative investors, we believe a barbell of extreme value and extreme quality could be implemented.
Investors should note that emerging markets remain a tactical long trade for us. Our October Fund Manager Survey revealed ‘greed’ for eurozone equities (most bullish asset allocation since 2007) and ongoing ‘anxiety’ over emerging markets (now at their most out-of-favour level versus the eurozone in 13 years.
Trends to watch
We believe the resolution of the current fiscal uncertainty should be positive for global growth. In our view, it remains critical for the 2014 outlook that the reduction in abnormally high savings at the US corporate sector continues to be rundown. We think a quieter Congress would help but investors should also watch the impact of the forthcoming US immigration reform bill on corporate “animal spirits”.
This could provide a positive supply-side shock for US businesses via potential citizenship for the nation’s 11 million illegal immigrants, a lower price of labour, housing demand and so on. The CBO estimates the bill could lift real GDP by 3.3% over the next decade.
Two other trends we believe are worth watching:
- This week China’s renminbi strengthened beyond 6.1 versus the dollar for the first time in 20 years; we believe an acceleration in the appreciation of the yen could raise concerns of lower demand for US Treasuries by China’s Government.
- Anything that raises inflation expectations in 2014, as this and a bond market rout remain the big “bear” risk for us.
