Business and financial
Stock market outlook for 2014
Graham Reid looks at how the next ı2 months could pan out for the global economy
A
t Investec, we moved into 20ı3 with cautious optimism that the global
economic recovery would continue and this would be reflected in equity valuations. Looking back, this was proven correct. But what is the outlook for 20ı4? Our research team have
spent considerable time formulating their thoughts for the year ahead and we have created our annual ‘Vision’ brochure, which touches upon many key themes. We are aware that equities
no longer offer the bargain basement valuations that were apparent last year and their prospects are therefore much more dependant upon near-term earnings growth. We are optimistic about both the global economic outlook and earnings growth prospects. In 20ı4, we expect the recovery in developed market economies to finally start to gain traction, while emerging market econo- mies continue to grow. In fact, it could be the first year since 2007 when we have simultaneous acceleration in growth in North America, Europe and Asia – a recipe for positive earnings ‘surprises’. Once again, this optimism
is not universally held, with the prospects for both Europe and emerging markets hotly debated. We are encouraged, however, by numerous factors: • companies, in aggregate, are very healthy and are
78 Scottish Dental magazine
potentially at the threshold of a new cycle of mergers and acquisitions;
• house prices are stabilising where they were weak and, remarkably, making new highs in prime centres;
• banks’ balance sheets are on their way to full repair and, more importantly, liabilities appear to be containable. With leading indicators such as business sentiment meas- ures nudging into positive territory, this fertile ground looks ready to bear fruit. The disappointing region in
20ı3 was emerging markets but, as long-term investors, we are keen to take these opportuni- ties to invest for our clients’ future. There is no doubt that a slow down in the growth rates in China and the Quan- titative Easing initiatives have impacted on the short term, but opportunities are abound in emerging markets for the patient who have suitable time
horizons to benefit from the emerging middle classes who have an insatiable appetite for a western lifestyle. In summary, we enter 20ı4 in
a positive frame of mind. We see prospects for concerted growth in all of the main economic blocks for the first time in several years, which suggests earnings should rise, potentially by low double digits. The greatest tension will be between that growth and the potential withdrawal of liquidity by central banks. If risk assets have re-rated upwards on the tide of surplus money, it is only fair to expect some payback. The key will be for earnings to grow faster than equities could possibly de-rate. In any event, rising earnings and dividends should assure better total returns from equities than bonds. It is almost surprising (given
the low esteem in which equi- ties are currently held, despite
major indices making all-time highs) that total returns from equities now outstrip those from bonds over every relevant investment period from one year to 30 years. That is the sort of statistic that galvanises asset allocators, and we would expect more support for equi- ties. Bonds, however, remain an integral component of balanced portfolios despite offering low nominal returns, as they provide the ‘insurance’ for our clients’ SIPPS, Charities, Trusts, ISAs, Offshore Bonds and taxable portfolios. Only five times in the last century have they provided a negative total return in the same year as equi- ties have fallen, the last time being ı994.
® If you would like to chat or receive a copy of our in-depth Vision 2014 booklet, please contact Graham Reid on 0131 226 5000 or
graham.reid@
investecwin.co.uk
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