Despite this year’s largely prolonged market rally, it seems the City is still largely optimistic for 2014, at least for Western equity markets. Brewin Dolphin expects the FTSE to reach 7,400 in 2014; the S&P to 1,900 and the Nikkei to breach 18,000 as equities become the asset class du jour.
“This is not built on a universal cyclical recovery, but rather will be played out by recognition of the deflationary or disinflationary expansion which we have been talking about all year,” says head of portfolio strategy Guy Foster.
“Policy makers and investors will come to recognise that extreme measures are required to combat deflation and that in such circumstances the prospects for equities are extremely robust.”
But if inflation remains weak, does this help or hinder everybody’s current favourite asset class, European equities? Foster believes the likes of Spain and Greece will flirt with deflation throughout the year, though Robert Quinn, chief European Equity Strategist at S&P Capital IQ expects the largest year-on-year improvements in 2014 to be visible in peripheral economies.
He points out that not only are credit conditions easing for both households and non-financial corporates, driving a credit impulse via lower costs of funding ahead of increased lending, but retail sales have also risen across most of the big European economies over the past two quarters.
“We expect cyclicals’ earnings to outstrip defensive peers by at least 15% over the next 12 months, allowing the current slight overvaluation to be quickly reversed,” he adds.
“Overall we expect the greatest investment opportunities to be in the peripheral equity markets, based on the most spread compression and delta in earnings recovery.”
Europe was named the region most widely expected to outperform in 2014, according to a recent AIC fund manager poll, while 84% of managers expect equity markets to rise in 2014.
Still, not everyone is so bullish, such as SocGen’s strategist Albert Edwards who argues investors should be moving to an overweight position in bonds, saying we are nearer to the end of an economic cycle rather than the beginning.
It’s clear from looking at the consensus view that next year’s unwanted presents may be the same as this year’s – emerging market equity funds, as commentator’s fear a prolonged slowdown in China and political uncertainty in other territories, such as India.
A case for contrarians, perhaps? Thomas Becket, chief investment officer at Psigma, certainly believes that cheap valuations, miserable sentiment, huge scepticism and under-ownership make Chinese equities a classic contrarian bet.
He adds: “When one combines these factors with the major recent policy announcements that could be transformational to the path and stability of the Chinese economy, it is fair to say that I'm bullish. Risks exist and should not be ignored, but after two and half years of utterly abject performance, 2014 might be the year of the Dragon’s equity market. In fact, our view is that it could be the year for Asian equities, generally.”
