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Canaccord's five key themes for 2014

A strong dollar and policymakers acting to tackle inequality are among five themes Canaccord Genuity Wealth Management believes could shape investment in 2014.

Here we present five key themes for 2014 identified by Canaccord Genuity Wealth Management. The firm is not expecting much from the start of 2014, believing equity markets are going to ‘take a pause’ for the first three to six months of the year before picking up and having a better second half of the year.

Click through the slides to see the five themes.

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Theme 1: A strong dollar

Canaccord said: ‘Consistent with our macro outlook, we expect growth, interest rate and inflation differentials to continue to favour the US among the G10 currencies, and we believe the USD will steadily appreciate during 2014. Portfolio flows favoured Europe in 2013, but with the marked equity valuation discount all but closed and further headwinds to growth, we believe that this will not be the case going forward.

‘The clear risk to our view is that dovish surprises from the Fed boost sentiment towards riskier currencies. Noting that the voting members of the FOMC will be more hawkish in 2014, we believe that this risk is lower than the market is pricing for.’

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Theme 2: Corporate profit share under threat

‘Since the 1980s productivity growth has decoupled from wage growth, diminishing the labour share of national incomes and leading to increased corporate saving (or decreasing investment). Of course, there is no economic law that asserts that technological progress will benefit everyone evenly, but increasing corporate saving is not growth positive and will not help western governments out of budgetary austerity.

‘We believe 2014 will be the year that policymakers start to address the growing imbalance. Governments must incentivise investment (in particular in infrastructure and technology-focused educational reform) and are also likely to drive wage growth in an effort to boost the marginal propensity to spend. German consumer sector should outperform.’

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Theme 3: De-globalisation

‘US industrial reshoring was one of our best performing themes of 2013. This year, we note with interest the latest UK Manufacturing Advisory Service (MAS) survey that highlights an emerging reshoring trend here too.

‘What’s surprising here is that more than a quarter of those considering reshoring are doing so to reduce cost, and a fifth to improve quality. We believe the repatriation of developed world supply chains will be a key investment theme going forward.’

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Theme 4: Déjà vu, all over again in Europe

‘The accord reached on banking union in late 2013 was interpreted as a landmark step by markets. We argue that in the short run we are no further forward – the resolution fund will not reach target level until 2026, leaving any bank’s home state to foot the bill of bank collapse in the interim.

‘We believe the impending asset quality review could trigger renewed equity market volatility. Furthermore, if banks have to find their own capital post stress tests, then credit is likely to continue crunching and growth is likely to remain subdued.’

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Theme 5: Policy renormalisation and debt servicing burdens

‘As the withdrawal of extraordinary monetary stimulus accelerates throughout 2014, the de facto ceiling that has been placed on government bond yields will continue to lift. Treasury yields do not just dictate the cost of borrowing for governments, but are also a benchmark against which lending to the private sector is priced.

‘In particular we highlight Canada, Sweden and the Netherlands (and to a lesser extent the UK, US and Australia) as regions in which a rising debt servicing burden may act as a significant headwind to consumption growth. These countries experienced an alarming pace of household leverage over the last decade, with no retracement since 2008 (unlike Europe or the US), fuelling consumption and housing booms.’

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