By Patrick Artus and Sophie Chardon
In order to predict where investors may find profit in 2014, it’s useful to analyse the global trends facing key asset classes.
In 2013, for instance, the most significant capital gains were made on the currency-hedged Nikkei, and – to a lesser extent – on peripheral eurozone bonds and in the real estate markets of the US, UK and Japan. But 2014 may bring fewer opportunities.
Emerging countries
As much of the developing world struggles with bottlenecks in skilled labour, energy and transport infrastructure, stagnant industrial production has weakened economic health and led to high external deficits.
Furthermore, the dependence of emerging countries on short-term foreign capital flows has resulted in a depreciation of exchange rates, moribund share prices and a rise in sovereign risk premia. All of which could continue well in to 2014.
With no improvement in supply conditions in sight, it is difficult to imagine capital gains being made on corporate assets in these countries. Indeed, against a backdrop of continued exchange-rate volatility and rising US interest rates, overall appetite for sovereign bonds could be limited for most of the year.
Peripheral bonds in the eurozone
The improvement in the peripheral bond market has carried over into early 2014. But will it continue? In our view, caution is well-advised. Investors need to keep in mind the prospect of weak eurozone growth and rising public debt ratios – and in particular the fact that long-term interest rates remain higher than the growth rate. In fact, a large part of the expected reduction in risk premia on these bonds has already taken place.
Equity markets in the United States and Europe
The US and European equity markets are not cheap. Price/earning ratios (PERs), for instance, have returned to their 2003-2007 levels. Yet if PERs remain stable in 2014, we should expect a rise in stock market indices similar to that in earnings per share.
Commodities
Although global growth is predicted to recover this year, it’s unlikely to reach the level needed to boost commodity prices – particularly in regards to oil or cyclical metals.
Japanese equities
Japan’s monetary policy will remain highly expansionary in 2014, largely due to the expectation of weak demand following the impending VAT hike in April. This should continue to drive Japanese share prices upwards and weaken the yen, while fuelling exporting-corporate profitability. For this reason, currency-hedged Japanese equities should remain a source of capital gain in 2014.
Conclusion: Where to look for capital gains in 2014?
Emerging countries are struggling to finance their external deficits. Meanwhile, risk premia on peripheral eurozone bonds have continued to tighten, and weak growth and rising public debt ratios remain a concern. Global growth is also proving insufficient to drive up commodity prices.
Consequently, currency-hedged Japanese equities are the only asset class we fully expect to provide significant capital gains in 2014. And this is largely thanks to the continuation of the Bank of Japan’s highly expansionary monetary policy – as well as the country’s ongoing rise in profitability.
We believe that 2013’s capital gains were made largely thanks to expansionary monetary policies and a perceived improvement in the eurozone’s situation. In 2014, however, finding capital gains may be more difficult.
Patrick Artus is chief economist at Natixis and Sophie Chardon is head of quantitative and cross-asset analysis at Natixis
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