The year ahead should be positive for investment markets as monetary conditions remain easy and global growth picks up
We explore what to look out for in 2014
Can gold reverse last year’s 28% decline or are further falls in store in 2014?
Boom or bust?
We start the New Year with an economic outlook
Despite the many doomsayers, we are cautiously optimistic regarding the global growth outlook in 2014. While returns are likely to be lower and more volatile than in 2013, the year ahead should be positive for investors – particularly those with exposure to growth assets – as monetary conditions remain relatively easy, fiscal policy loosens and global economic growth continues to recover.
Easy monetary conditions
As a result of the 2012/13 slowdown in growth, spare production capacity remains immense and inflationary pressures are therefore likely to remain low. Consequently, global interest rates are also likely to remain low in the medium-term:
The US Federal Reserve (Fed) is moving to slow its quantitative easing program with the interest rate set to remain near zero until 2015.
Japan and Europe may see more monetary easing. The Japanese government is firmly focused on implementing its multipronged economic stimulus measures while the European Central Bank is seeking to promote economic growth in the Eurozone.
Fiscal reins loosen
The drag on global growth from fiscal tightening is receding from around 1.3% of gross domestic product (GDP) in 2013 to around 0.7% of GDP in 2014. Fortunately, the big fiscal tightening in Europe and the US is largely behind us.
US: fiscal tightening will shrink from 2.3% of GDP to 0.6% of GDP.
Europe: fiscal tightening will fall from 1.1% of GDP to 0.3% of GDP.
Global economy recovers
Global economic growth is likely to increase to around 3.5% from 3% in 2013. Currently economic growth forecasts range from 1% in the Europe, 1.5% in Japan, 3% in the US and 5% in the emerging world with China at 7-7.5%.
What’s Australia’s outlook?
In Australia, the combination of a housing recovery, gradually improving confidence, a pick-up in non-mining investment and stronger global growth are expected to result in growth pushing up to around 3% by the end of 2014.
Inflation is likely to remain benign and the Reserve Bank of Australia (RBA) is expected to keep the cash rate on hold at the current historical low of 2.5% for at least the first half of the year. A possible interest rate hike later in 2014 could see the cash rate end the year at 3%.
What does this mean for investors?
Improving global growth, coupled with low inflation and low interest rates, provides a positive backdrop for growth assets such as shares in 2014. However, with shares no longer dirt cheap (and more dependent on rising earnings), returns may be lower and more volatile than those we saw in 2013.
Conversely, defensive investments such as bonds and cash will remain under pressure as investors continue to switch out of these asset classes in favour of more growth-oriented opportunities.
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