December 11, 2013
Trends to watch during the coming 12 months
With the approaching end of 2013, investors are turning their eye to the New Year. While major financial forecasters vary somewhat in their outlooks, the consensus goes something like this: western economies will grow slowly, but sluggishly, during the next 12 months. Stocks will rise slightly slower for the year as a whole than they did in 2013 when indexes registered large gains, though they could see a mild interim correction.
While we tend to push back against the consensus, we base our investment outlook in large part what experts at the IMF, the OECD and the Bank of Canada are saying. However we will also be eyeing several other developments closely.
How will global growth play out in emerging markets?
Canadian stocks had an exceptionally strong year. However materials and energy issues, which comprise a huge part of the overall S&P/TSX index, tended to underperform. This was in large part due to weaker demand for resources in emerging markets, many of which are Canada’s biggest customers. A bounce-back would provide support for equities and for Canada’s frothy housing sector.
Will the strong profit performance of US companies continue?
US corporate profits reached record levels this year both in nominal terms and as a percentage of Gross Domestic Product. However caution is in order. High profits as a percentage of the overall economy eventually tend to attract the attention of competitors looking to get in on the action, and of governments seeking to increase their cut of the loot. Conversely, low interest rates make it easier for companies to buy back stock and thus boost earnings per share and share prices.
Will the Fed “taper?”
The US Federal Reserve has been engaging in “financial repression,” which means keeping interest rates lower than the rate of inflation. The idea is to force savers to invest in the real economy. Few forecasters believe that this policy will change anytime soon. However if the US central bank does “taper,” its asset purchases, as many suspect, this could be a signal that rate hikes are on their way, which could affect investor sentiment.
What about gridlock in Washington?
US mid-term elections in November of 2014, in which all House of Representative seats and one third of Senate seats will be up for grabs, will put political posturing at a premium. Democrats and Republicans will thus be focusing more than usual on their personal interests (if that’s even possible). This will have important implications in debates, scheduled for early next year, on raising the US debt ceiling and on a fiscal pact to resolve America’s long-term term budget deficit.
What will happen to “cash on the sidelines?”
One of the more interesting developments related to recent equity price appreciations is how few people participated. Many investors, burned by the tech bubble and financial crises, weren’t along for the ride as the New York and Toronto indexes more than doubled during the past five years.
There are thus significant amounts of cash stockpiled in low yielding fixed income investments on corporate balance sheets, pension funds and individual accounts. Investment flows into mutual funds for example, only turned positive last year in the United States, despite significant gains. The degree to which sideline funds move into equities, will be a major investment performance driver, during the coming year.
© 2013, 2012, 2011, 2010, 2009, 2008, 2007, 2006, 2005, 2004, 2003, 2002, 2001, 2000, 1999, 1998
Peter Diekmeyer Communications Inc.