Investing in 2014
Financial markets continue to be buffeted by a swirling mixture of cyclical and structural forces. While closely watched economic data, such as GDP and earnings growth, tell part of the story, the Global Investment Solutions team digs deeper by also examining underlying themes that can transform the economic landscape. The purpose of our thematic research is to identify risks and opportunities in the markets in which we invest. Investing in 2014 sets out eight of these themes, combining strategic considerations with a focus on 2014.
These themes don’t just impact markets - they also impact each other. Figure 1 illustrates some of the ways in which this happens, although it is not exhaustive.
One could also argue, for example, that the eurozone crisis is inextricably linked with deleveraging, or that energy evolution has important implications for inflation. One could also argue, for example, that the eurozone crisis is inextricably linked with deleveraging, or that energy evolution has important implications for inflation. We highlight certain key aspects of each theme, and list some of the many ways in which these themes affect the asset classes in which we invest.
A crude awakening
Innovative techniques, such as hydraulic fracturing and horizontal drilling, could be game-changers for North American economies. Decades of energy dependence and high transportation costs could come to an end. Energy independence has important geopolitical ramifications too.
The emerging world
The relationship between developed markets and emerging markets is changing. As economic recovery continues to progress in most parts of the world, investors should keep an eye out for structural changes ahead, as a slowdown in emerging markets is expected. Double-digit growth in emerging markets looks like a thing of the past, even in China.
I There are no right or wrong answers when it comes to debt levels. However, we are seeing clear signs of deleveraging in the US. In contrast, peripheral eurozone countries have barely begun to deleverage, and debt levels are actually heating up in emerging Asia and in countries relatively unaffected by the financial crisis such as Sweden, Canada and Australia.
Two steps forward, one step back
The eurozone’s initial response to the financial crisis involved painful austerity measures that hampered growth. Now, we are looking at a combination of austerity and growth that is seen as “two steps forward, one step back.” Although structural problems still beset the eurozone, we expect cyclical recovery to take hold in 2014.
Which way to the punchbowl?
As ‘easy money’ policies are expected to come to an end, central banks around the world will have to formulate their exit strategies very carefully, since they have the potential to cause market volatility.
Which medicine works?
Governments have implemented growth, austerity or both policies in response to the global financial crisis. Growth seems to have brought better results than austerity. Investors should keep a close eye on policies around the globe to see how these policies will affect different asset classes.
Waiting for Godot
Inflation has remained under control despite unconventional monetary policies around the globe. Sluggish growth outlooks and the increased supply of key commodities make it highly unlikely that inflation will spike. However, high structural inflation remains possible in emerging markets, such as in India.
The new fashion
Low bond yields due to easy money policies by central banks are encouraging many bond investors to rotate out of fixed income and shift to equities. We think the rotation may be underway, but it may not be as drastic as people make it out to be.
Swiss economy on the up and up
The Swiss economy is performing well overall. It looks set to post growth of about 2% in 2013, and we expect similar expansion in 2014 and 2015. There are still risks, however.
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