Market Update and Outlook for 2014

For those of you that have spent your time away from the markets this Christmas, you may not have noticed the slightly more risk-on period where global equity markets grew slightly further towards the end of 2013.   The short rally allowed the FTSE to end the year at 6749.09, which is a 14.4% rise over the 2013 calendar year (18.66% total return).

As always a New Year calls for new forecasts and this year’s forecasts will prove to be challenging. Many of the key themes we saw in 2013 such as central bank policy and the argument over is ceasing easing effectively monetary tightening, will again be of paramount importance this year.  However, there will be more of a focus towards economic conditions in Europe and the UK rather than the U.S, especially as we are due an election n the UK in 2015.

In the UK the expectation of an interest rate rise is beginning to increase as interest rates can only stay low for so long before this starts to impact on the economy.  The unemployment rate is steadily falling towards 7% and we are beginning to see significant rises in property prices with some parts of London seeing double digit growth last year.  This is ultimately leading the path to suggest an interest rate rise is on the horizon.   Whilst we don’t see any immediate increase in rates this year, it will always be in the back of investors’ minds and as such this is beginning to be priced in to the bond markets.   We have seen the gilt yield rise to 3% before dipping slightly to 2.83% and this has worked in our favour as we made the decision to go invest in the yield going up and values going down, effectively making money for clients when values fall.  The difficulty the Bank of England has is trying to minimise and diminish the short term impact of raising rates to help support long term economic growth.

With regards to Europe, the Eurozone reported headline CPI to fall to 0.8% last week which was below many analyst expectations of 0.9% and still significantly lower than the ECB’s target of 2%.  The deflationary pressures are cause for concern.  With interest rates in the Eurozone already at historical lows of 0.25% this calls to question what they can do next.  Ultimately, the ECB has two options, Quantitative Easing (QE) similar to that of the U.S. or a move to negative deposit rates.

A negative deposit rate should effectively encourage banks to begin lending out money and encourage consumers to start spending.  However, the theory of negative rates is relatively untested and so it is difficult to envisage some of the potential risks.

Given the above, we don’t expect a smooth ride in 2014 and we don’t expect to see the stock markets deliver double digit returns as was the case in 2013.  However, we anticipate that the changes we have made to our portfolios will allow us to benefit from the continuing positive economic data.

Policy tightening across the globe should remain pro-growth albeit cause some volatility with future announcements.  On that basis we would expect risk weighted assets such as equity to make good progress this year.

Overall therefore we are optimistic and we feel the future is bright, accepting it certainly is not Orange!

All the very best for the year ahead.

Jason Stather-Lodge

CIO