2013 is ending up with a double digit performance for the share market, probably continuing into March 2013.
In brief
We identified three themes for 2014:
Australia is slowing down.
China, Japan, UK are in resurgence
US is consolidating momentum
Outcome:
– Diversify abroad
– Allocate to companies with earning exposures abroad specially USA, UK and China such as FOX, NAB and Sydney Airport.
– Dividend plays will remain strong, but not outperform
– Cyclical and Consumer retail/discretionary and some Government-influenced infrastructure, after the massive rally, will struggle to justify prices
– Some big cap in the material and energy space such as BHP could surprise with special dividends.
In depth
At first we have to look at the three main factors here and around the globe: the economy, the geopolitical risks and then the share market
Economy
Australia is in a problematic position:
-Mining is slowing down
-The Government is proceeding with the fiscal tightening
-The consumer is not increasing spending
-Housing market, after a fast recovery, is stabilizing
-The Australian Dollar is still too high
-Productivity is not improving.
It almost feels the Paul Keating’s “the recession we had to have”. We need a recession to, hopefully, restructure Australia for the new post-mining boom era (mining will still be a great investment sector but not the driver of the entire country.
China
China has been through major reforms and exited the slowdown phase. This could well be the market to be in for 2014!
USA
The US had an incredible recovery – 2014 will be the test year – to see if valuation matches expectation. But with low red tape, technological innovation and shale oil, it could well beat expectations –again.
Asean/Emerging Markets
Pan Asia market will be laggards respect China and US as the US Federal Reserve “tapering effect” will keep on draining capital from these markets. As oil is cheaper and China recovering, they will perform better than 2013.
Japan
In 2014 we will see if the revolutionary approach of Prime Minister Abe will work. He practically laid a path for the country, in a truly Japanese style, of victory or death, we do believe he will be victorious – but what he is attempting has never been done before. As Japan is a very insular country, apart psychologically effects, even a bust effect should not have too much effect in the world.
Great Europe
Europe is starting to exit its economic crisis (but still no end in sight for the political crisis). The markets to watch on the positive side are specially UK and Germany.
Geopolitical risks.
Asia
The main risk is the escalating tensions between China, Japan and South Korea. A war is not on the card, but accident could provoke moments of panic.
America
The main risk here around the end of quantitative easing. But the Federal Reserve has quite a long experience on fiscal tightening and should be able to manage it.
Europe
The economic crisis is at the tail end, but the profound social and political problems have not been addressed. Even if it seems weird to say, there is the potential basis for revolution in some countries (especially in Greece with 50% of youth unemployment), but the Governments are fully aware of the situation and strictly monitor potential unrest as demonstrated by the arrest of the Golden Dawn leaders in Greece.
Middle East
Syria is a battleground between Saudi Arabia and Iran. The openings of US/Iran negotiation is strongly despised by Israel and Saudi Arabia and a potential issue for the oil producers. Apart some wild act of terrorism, for once, in relation to market it could have potential positive effects due to falling oil prices.
The future –geopolitical
In the years to come we will see an increase in geopolitical tensions – this is due to the new non-interventionist stance of the USA. Their new politic is to stay out of direct involvement (Eg Syria, Japan-China). This will allow the rise of regional competing powers, more likely to escalate regional conflicts of limited size.
Share Market take away
2014 will be a much more selective market than 2013 –as valuation have now recovered to normal level – only the companies that really deliver will be prized. And as Australia slows, investors needs to accept the necessity of a truly global asset allocation, even if it means relinquishing a little bit of dividends – luckily providers are coming to market solving this issue!
investorpolitico 