By Luca Paolini
In our view, 2014 will see markets enter a distinct new phase, one in which central bank liquidity – for so long a hugely positive influence on investor sentiment – will have a weaker impact on asset class returns than economic growth. As this transition from a liquidity to growth-influenced market unfolds, world stocks are likely to deliver more muted returns in 2014 while bonds will in the main struggle to break into positive territory.
Although the European Central Bank and the Bank of Japan (BoJ) will remain in monetary easing mode throughout the year, the US’s move to wind down its monetary stimulus programme is likely to have a negative effect on global liquidity, removing a key support for financial markets. There has been a strong positive correlation between Fed’s liquidity injections and global stocks’ price-earnings ratios over the past several months. So a reduction in US monetary stimulus could result in a mild narrowing of world stocks’ earnings multiples.
But that’s not to say the outlook for stocks is negative. There are a number of developments that will serve to counter the effects of a slowdown in the pace of US quantitative easing;
– US monetary policymakers are certain to maintain a dovish interest rate stance.
– US fiscal policy is set to become less restrictive. Public spending will continue to be cut to reduce government debt burdens but, critically, the pace of deleveraging will slow, both in the US and in Europe.
The key support for equity markets next year will come from accelerating global economic growth. For the first time in several years, 2014 will see an increase in economic growth across all of the world’s major regions. We expect global growth to rise by almost one percentage point to 3.3%, US growth to pick up to 2.8% and eurozone growth to rise to 1.25% from -0.3% in 2013. Emerging markets will see output increase at a rate of 5.2% from 4.6%.
This will translate into an increase in corporate profits worldwide. Global corporate profits tend to rise some six months after the emergence of a recovery in the US manufacturing sector (which we see as a good proxy for global growth).
When we take our economic projections into account, we think that for the first time in two years corporate earnings could rise at a faster rate than consensus forecasts, which currently sit around 10.5% for the US firms and 10.9% for global stocks.
Luca Paolini is chief strategist at Pictet Asset Management
Comments