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GAM's Hepworth: what the New Year holds for the five continents
by Elsa Buchanan on Dec 12, 2013 at 11:26
Looking into 2014, GAM's investment director expects a slight change of emphasis, particularly as the QE exit strategy is clarified. Here, he looks at what the year holds for investors on the five continents.
Looking back at 2013, it is clear quantitative easing (QE) – and more recently, the prospect of its slowing and eventual end –means political concerns have superseded fundamentals in driving markets up as well as down. But looking in the future, GAM's investment director Charles Hepworth sees these factors becoming less dominant.
'Tapering remains the major uncertainty hanging over markets - especially what impact this will have, particularly in the short term,' he says.
While he believes markets may have already accepted tapering to happen at some stage, he warns investors should prepare against a potential similar sell-off to when Fed Chairman Ben Bernanke first announced plans to slow QE.
'This level of uncertainty feeds into our change-of-emphasis argument – when clarity does finally emerge, the cloud over markets should lift,' he adds.
Here Hepworth shares his thoughts on what the new year holds for investors in global equities.
Inflation: expect it to remain muted in developed marketsWhile 2014 will see a change at the top of the Fed, with dovish Janet Yellen most likely to take over as chair in January, Hepworth says inflation is yet to become a major concern in developed markets, and recent oil price declines should prolong this.'For us, muted inflation gives the policymakers grappling with QE the flexibility to consider other measures, with low interest rates expected to continue,' he said.Politics will be prevalent in 2014, and the US debt ceiling debate will take centre of stage next year.However, Hepworth is adamant the US will remain on a steady path to recovery and will be followed by the UK.'[In the UK], rising house prices continue to boost consumer sentiment which should feed into consumer spending,' the investment head said.'Of course, a rise in real wages would have a greater impact, but at this stage real wage growth remains anaemic,' he says.
A new EuropeEurope has also started to show signs of recovery this year and many of the factors keeping investors away since the credit crunch are finally starting to dissipate, Hepworth said.Structural improvements in the periphery have been key to this, with an improving current account and fiscal situation across the previously troubled ‘PIIGS’ (Portugal, Ireland, Italy, Greece and Spain).'This means economic growth is now recovering – albeit slowly – across core and periphery countries, and yet, from an investment perspective, European equities remain cheap on ‘normalised’ earnings metrics,' he said.
Could the sales tax impact growth in Japan?
Japan has proven the surprise story of 2013, with prime minister Shinzo Abe’s wide-reaching ‘Abenomics’ policies leading many to believe the country will finally break out of its two-decade deflationary spiral.
In Hepworth's opinion, next year should see many of Abe’s reforms 'come to fruition', including the gigantic injection of money into the system, and the world will be watching with interest.But recovery could be tipped by a novelty in Japan: a reform in consumption taxes. Hepworth said: 'One thing to keep an eye out for is a planned sales tax increase in April, which many fear could have a detrimental impact on consumer spending.' The country currently boasts the lowest sales tax rate, or VAT, in the developed world at 5%, but from 1 April 2014, the government will increase the rate to 8%.
East is East
Looking eastward, emerging market equities have continued to underperform developed markets in 2013, with the asset class suffering heavily in the summer sell-off.
'With little basis in fundamentals, this clearly provided a good opportunity to pick up oversold emerging market assets,' Hepworth said. 'But the magnitude of panic selling means we are likely to be cautious on the region as and when tapering begins in earnest.'
On the macro side, developments in the Middle East look look 'positive', he said, with new Iranian president Hassan Rohani 'seemingly more willing than his predecessor to interact on the global stage'.
The investment head also expects the oil price to fall as a result of supply from Iran coming back onto the market.This, he said, could potentially have a disinflationary effect and boost consumer spending.
'It’s clear that politics have been a dominant force over markets in 2013.
Once tapering questions are resolved, however, plenty of positives should manifest as the economic recovery continues, although no one should discount the possibility of another taper tantrum,' he added.