The environment is beginning to normalise

Jeff Rogers
Chief Investment Officer, ipac

Over the past year advanced economies have provided investors with some reassuring signs of improvement. This has translated into strong performance in global share markets over the period.

This improvement has come as some relief for investors who have had the courage and patience to remain invested through what has felt like a long-bumpy journey. The end of 2013 marked the fifth anniversary of the nadir of the global financial crisis (GFC). The sense of loss at the time is still vivid in the minds of many investors.

While investor outcomes will differ depending on product choices and cash flows, in many cases, wealth has been rebuilt for those who stayed the course and remained invested.

As we enter 2014 we have been watching the trends of advanced economies which are showing promising signs of rebuilding since the lows of the GFC. In particular, the US economic recovery appears to have finally got a firmer footing, allowing the US Federal Reserve to start to reduce some of the stimulus measures it began implementing in November 2008. Importantly, the US housing market, the nexus of the financial crisis, continues to show signs of recovery, while at the same time investors have been cheered by good company earnings.

In Europe, the economic recovery has not been as smooth or as convincing. However, fears of a possible break-up of the Eurozone have receded and growth has returned if somewhat falteringly.

The Japanese government, under the leadership of Prime Minister Abe, remains firmly focused on implementing a variety of economic stimulus measures to lift its economy out of its long-term deflationary malaise.

In Australia, while the share market lagged its counterparts, the combination of gradually improving confidence, a pick-up in non-mining investment and stronger global activity are expected to support a growth rebound later in the year.

In summary, years of exceptionally accommodative monetary policy have ushered in a measure of confidence in the global economic outlook.

Bond prices, which have been unusually high, came under downward pressure as the economic environment began to normalise. Often when bonds sell off there’s some concern that other assets could come under pressure. This wasn’t the case last year. Shares in developed economies delivered strong returns off the back of an improved outlook for corporate earnings.

We expect to see a continuation of these trends with bond prices falling somewhat and share markets rising, albeit in a more muted fashion. Share returns are expected to be more closely aligned to earnings growth, which would be a good outcome.

While the current macroeconomic backdrop and its implications for investment outcomes are always essential components to investing, it’s important to recognise that investors who remain committed to their long-term strategies can achieve sensible outcomes even in unusual environments.

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Important note: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) make no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided.