One thing investors do know
about 2014 is that it will kick off with a tiresome reprise of the October 2013
debt-ceiling debate in Washington, thanks to the short-term nature of the
last-minute agreement reached then.
Government agencies are funded through to the middle of January
2014, and the US' borrowing authority has been extended to February 7, 2014. So
a bout of name-calling and gridlock in Washington to start the year is almost
assured, which is likely to dampen investor sentiment. Once that is out of the
way - whether through genuine fiscal-policy concessions on either side, or
simply another fob-off that buys a few months, markets can start to look ahead
to the year proper.
What they're hoping to see is synchronised global economic
growth - across the US, China, Japan and Europe - for the first time since
2010.
The International Monetary Fund (IMF) forecasts global growth to
average 2.9 per cent in 2013 - a significant drop on the 3.2 per cent growth
rate recorded in 2012 - before rising to 3.6 per cent in 2014.
On the growth front, it is taken for granted that China will be
the main driver of the global economy: all that remains to be seen is the rate
of growth. China's Gross Domestic Product (GDP) grew by 7.7 per cent in the
first quarter and by 7.5 per cent in the second quarter, according to the
National Bureau of Statistics of China. The country's annual growth target for
2013 is 7.5 per cent, and China has certainly demonstrated a penchant for
matching its target.
Of course, 7.5 per cent is a deceleration from the growth rates
the world has come to expect from China in recent decades, but is consistent
with Beijing's desire to transform its economy from an investment- and
export-driven economy to a western-style services- and consumption-driven
economy.
The US is expected to be the second-largest contributor to the
global economy's projected modest rebound in 2014. According to the Conference
Board, the world's largest economy will post an annual growth rate of 2.3 per
cent in 2014, compared with an expected 1.6 per cent in 2013, driven by
continued strength in private demand, supported by a recovering housing market
and rising household wealth.
The calendar-year growth rate for the Japanese economy is
expected to come in at about 2 per cent, falling to 1.25 per cent in 2014 as a
consumption tax hike starts to bite. But in keeping with the hoped-for global
theme, at least Japan will be growing in 2014.
Europe, however, has still not been released from hospital, even
after emerging from an 18-month recession in the second quarter of 2013, ending
the most persistent contraction in continental Europe in more than four
decades. Third-quarter data did not consolidate this recovery, with German
growth slowing markedly, from 0.7 per cent in the second quarter to 0.3 per
cent in the third, and the second-largest economy, France, actually shrinking
again after growth in the second quarter. (As at September 2013, France has
shrunk in three of the last four quarters.) That resulted in an anaemic Eurozone
growth rate of 0.1 per cent.
Europe is where the synchronised-growth thesis appears weakest,
as record high unemployment and lack of confidence - on the part of the
consumer, corporates and the markets - continues to choke the economy. But the
good news is that some of the more troubled southern European economies are
showing growth - for example, Spain grew at 0.1 per cent in the third quarter
of 2013, its first quarter-on-quarter growth since the first quarter of 2011 -
and Portugal grew for the second straight quarter. If France can hold the line,
Europe could cling to a positive growth rate in 2014.
If so, the synchronised-growth expectation would buttress the
sharemarkets, with one big caveat: the Federal Reserve, and exactly when it
removes quantitative easing (QE). Throughout 2013, the prospect of this
happening has unnerved markets, which is perverse: removal of QE would signify
that meaningful US economic recovery - driven by pent-up demand in the housing
market - is finally under way. At some stage in the near future, the
"tapering" that the Fed says will indicate the beginning of the end
for QE will start, and by mid-2014, QE should be removed.
Housing, employment, and manufacturing activity are all
improving slowly in the US, and over 2014 the recovery in household finances -
helped by low interest rates - is expected to kick-off recovery in consumer
spending. Lower energy costs are expected to boost US manufacturing further.
In Australia, the key risk is the slowing of the economy as its
transition continues, from being driven by mining investment, to the
manufacturing/export sectors. However, the ‘revenue' side of the mining boom
has not even started, and resources export revenue could be significantly
higher in 2014.
While sharemarket valuations appear quite full, the
low-inflation recovery looks like favouring equities over bonds, but with the
usual warnings in place: the interplay between politics and markets in
Washington, Beijing, Tokyo and Europe could easily turn into a negative for
investors. But synchronised global economic growth would be a good premise on
which to base the year.
James Dunn | 08 December 2013
Indices:
The
Australian All Ordinaries Index has moved up increasing by +0.4%
since closing last Friday to 02:15 pm today.
The
rest of the world as measured by the MSCI index decreased -0.3%
in A$ from closing last Friday to end of trade Thursday.
Have a great weekend,
The team at IPS
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