Investment Outlook 2014
At the start of 2014 there is clearly a degree of relief being felt across markets as economies begin to gain momentum (not necessarily in Europe but elsewhere). The early stages of reform packages in parts of Asia including Japan, India and Indonesia are also a promising sign of things to come. From an investment perspective current returns are relatively flat compared with those seen in the previous few years of 10-15%.
Markets on the whole have been slowing down as valuations adjust with their usual forward looking perspective. Many companies have built up large cash balances, this would normally spur economic momentum, however many are re-purchasing shares or returning money to shareholders, reflecting a generally more cautious approach toward potential economic growth.
Reforms in India brought about by new governance are a real positive in the year to date, as well as the further programmes of reform taking place in the Japanese, Chinese and Indonesian economies all painting a positive picture for Asia as a whole. It is quite possible that the East could prove to be the global engine of growth for these reasons.
Once Quantitative Easing slows and interest rates begin to rise the global economy may begin to slow further as debt servicing costs increase and eat into spending power. Corporate profits have built up as a result of higher profit margins and not materially higher total revenues, this is a different balance to what would normally be expected.
UK politics are likely to have a greater influence on domestic markets than in previous years, this is part due to European reforms and part due to electoral uncertainty. A large part of the UK budget deficit is still yet to be resolved, with only a third of the total spending cuts planned having been undertaken. The result of the election in itself it likely to impact the form of austerity undertaken, whether it be a direct austerity or higher taxes.
There are five major differences between this recovery and those in the past:
- Developing countries are now larger than many in the developed world meaning developing world economic events exert a much more global impact.
- Companies are behaving in a less confident manner and hoarding cash.
- The labour market is fundamentally different. With a rise in the number of part-time contracts and self-employed individuals; employment is historically higher than it would be out of a recovery and there has not been a build-up in income or wages.
- The supply of credit is more constrained due to greater regulatory pressure on institutions, while individual debt is already at high levels.
- A set of monetary policies that are quite unprecedented. Central Banks printing money to their current levels may lead to longer term valuation adjustments.
One key theme for this year is broader de-risking, which has been twofold:
- A general move toward real assets including infrastructure, commodities and property as these assets still retain attractive valuations(we have recently asked both Lazard and Henderson for their perspectives on infrastructure and property).
- Stock markets are a relatively expensive asset class. This is causing a slow withdrawal of funds and individuals reducing their holding of equity as a proportion of their portfolio. Many are ‘taking the gains’ from selling rather than continuing to hold.
A generally more cautious game is therefore being played.
To find out more about Fiducia’s current investment process and philosophy click here.