The final three months of 2013 maintained the upbeat traction acquired in Quarter 3. Equities prospered, broadly speaking, with the US market the strongest performer by some margin, although healthy gains were also achieved across UK and European bourses. Emerging markets laboured, however, posting a slight loss to cap a lacklustre year, ending 2013 down 4.4% overall. In other asset classes, bonds retreated into negative territory, while alternatives such as property, absolute return, private equity and infrastructure all achieved healthy numbers, reinforcing the gains posted in the previous quarter.
October began in a tentative manner, as the impending deadline to resolve the US debt impasse weighed heavily on investor mindsets, with little meaningful market activity ensuing. Doubts as to whether a deal would be struck put the US credit rating under the spotlight of several rating agencies, but mid-month an eleventh hour deal was reached to avert default. Risk assets responded in buoyant fashion, with equity indices the world over recording sharp appreciations, fuelled by investors’ new-found optimism. Gold also enjoyed a bounce, but the same could not be said for the dollar, which depreciated against a basket of international currencies. Upbeat Chinese data strengthened the optimistic mood still further, with the news that economic growth rebounded in Quarter 3 to an annualised rate of 7.8% warmly received by investors.
Progression into November failed to sustain the optimism, however, with European woes taking centre stage. The European Central Bank (ECB) surprised markets by cutting the benchmark rate by 0.25% in an attempt to ward off deflationary pressure, a move interpreted to mean underlying economics in Europe were still fragile. A downgrade to the French credit rating did little to lift the mood, two factors that, in conjunction, sent the Euro and the wider market equity markets tumbling. Sterling also weakened due to a larger than expected fall in inflation, but, elsewhere, rumours of further intervention by the Bank of Japan to weaken the Yen sent Japanese indices to six-month highs. US equity markets joined Japan in posting strong gains, with the Dow passing the 16,000 level for the first time ever. Employment data came in at double analyst forecasts which stoked investor bullishness, as did the news that Janet Yellen, a renowned advocate of loose monetary policy, was poised to be the next head of the US Federal Reserve.
The final month of the quarter, December, was dominated by escalating conjecture that the US Fed was finally about to begin tightening the printing presses. An unexpected upward revision to Quarter 3 US GDP – interpreted as raising the likelihood of a curtailment in stimulus – spooked investors, causing a spike in US Treasury yields to circa 3%, a level not previously seen since September. Unemployment hitting a five-year low heightened curtailment talk, with the US economy adding 18,000 more jobs than forecast, news that triggered a further sell-off in Treasuries. Trading with one eye on stimulus reduction continued until the latter days of the month, at which point the news filtered through that a notional $10 billion per month taper had been agreed upon. Equity markets rejoiced in the news, with indices in the US, UK, Europe and Japan all rising sharply, encouraged by the taper being less than expected and that uncertainty had, at last, come to an end.
Our outlook for 2014 remains one of cautious optimism but we are mindful that risks remain. From a positive perspective, improving economic data across many notable economies should contribute toward maintaining positive momentum, as should strengthening corporate earnings. In addition, irrespective of the sell off that has been witnessed within emerging market equities of late, we are still firmly of the opinion that these markets are the most attractive, underpinned by a burgeoning middle class that is seeing its disposable income grow at a rate comfortably in excess of Western consumers. However, risks certainly still prevail within the financial system, the most prominent of which is the amount of debt in issue, as recent analysis suggests that there may be up to 30% more debt in circulation than before the crisis in 2008. European sovereign debt is a perennial unsolved problem, with no meaningful solutions put forward to date, while the ramifications of additional QE tapering in the US are uncertain.