Now that 2013 is over and the first month of 2014 has passed it is time to review the investment market situation. The analysis below comprises of information from our November client presentation, a PIMCO (world largest bond manager) presentation Feb 2014 and various articles from the Australian Financial Review.
In a nutshell 2014 will be more of the same from 2013. There will be continued steady slow growth in the USA, but there will be days and weeks when the markets over react to some bad news and then over react back again on good news.
The last week of January was a typical case in point.
Globally and in particular the USA is at an inflexion point where the withdrawal of government funding and possible interest rate rises is due to improved economic conditions. But the expectation that the economy can stand by itself without heavy Government support also scares the socks of some people (unnecessarily). The end result is slow growth with the odd week or two of high volatility occurring every couple of months.
Globally: Economic growth is likely to be about 2.25%, with a wide variety of outcomes for different countries.
USA: The story is all about the USA in recovery. The company reporting season has almost finished and so far as at early February 75% of companies who have reported have shown an increase in profits by 9.5% - compared with the expected 7.6% target.
So far so good.
The GDP growth is expected to be 2.5%
The rising property market instills more confidence into consumers and creates employment opportunities in the building industry.
The unemployment figures have been falling and the new job growth through late last year have been solid and also revised upwards at a later date as well. So the poor January figure, after a particular rough winter in the North East is not a trend breaker.
However growth at the 2.5% figure will be held in check by the rise of mortgage rates.
The USA has a high level of use of 30 year mortgages which have risen from
3.42% last April’13 … to 4.24% Feb’14. This in its own right limits any rapid growth or inflation.
Hence the official interest rates are likely to remain on hold until late 2015 mid 2016.
China: Is undergoing a major change in the economy internally with major financial market reforms in banking, lending and ultimately free exchange rates. This will cause a lot of noise and shake but is not expected by major investment specialists to create their own GFC. Despite some severe sabre rattling by various well known doomsayers looking for a headline. The softer China economy will affect the Australian economy and has started to affect us already. However, growth is still expected to be 7.0% this year.
Europe: The Eurozone is picking itself off the floor, but will continue to lag behind the USA recovery due to the various inflexible and fragmented approaches by the different governments. The overall improvement is weak.
Growth is expected to be no more than 0.5%.
Australia: We are due for some tough times with increased unemployment and a slowing economy after the fading mining investment boom. The softer Chinese economy is affecting us already. At some point the Australian dollar will slide to about $US0.84 over a 12 month period and cushion the economy as it has done in the past. Low interest rates and lower exchange rate will help redirect investments into other sectors – but our economy will lag until then before improving. You will hear quite a bit about “below trend growth”, meaning that annual growth is less than the long term average. Leading to increased unemployment.
The RBA is likely to simply sit and wait for our historically low rates to have an impact.
Increase in rates in under 12 months seems very unlikely.