We divide the markets and economic outlook 2014 into the two separate sections because, as is evident from our commentary, the markets and the economy are separate ‘entities’, but each an influence on the other: without the economy there is no market; the market provides financial lubrication for the economy.

Continuum Financial Planners Pty Ltd view1

market-outlook-indicator-grinding-upward2014 Markets Outlook Timeline:

January: volatility late in month if US Senate and Congress can’t make decision on debt ceiling and funding government operations (although this may have been settled by mid-December 2013; in which case we anticipate there will just be a mild ‘pause’ in growth late in the month)

February: potential volatility later in month as consequences of the continuing tapering, started in January, is felt in affected markets around the globe

(Whilst the above events are both US-centric, they have global repercussions, particularly through the Emerging Markets – affecting capital flows. If the above two events are circumvented, expect ‘normal’ volatility with mild market improvement trending.)

March/ April: anticipating mild volatility as market digests and responds to Fed tapering: possibility of some marginal improvement in market values by the end of this time

May: this is expected to be a flat month: in the USA they use the expression ‘sell in May and go away’ as they anticipate their Summer holiday season: on average, this is a month to give up some of the gains attained earlier in the year

June/ September: market trend ‘grinding’ upwards, with ‘normal’ volatility likely to be experienced

October: this is the period immediately leading into the US mid-term Congressional elections: anticipate some volatility as speculators ponder the possibilities for President Obama’s then final two years. On a global basis we expect there to be continued grinding growth, with minimal volatility

November/ December: once the US mid-term elections are done, we expect there to be growth globally in the markets through to the end of the year, Australian investors with a diversified portfolio in-tact throughout, finishing the year with high-single-digit to low-double-digit growth (year on year)

Forecasts for markets, rates etc, by 31 December 2014:
AllOrds 5400 to 5600
AUD/ USD 85 to 88 cents
RBA ‘rate’ 2.25% (with one drop in rate early in second quarter; and talking about an increase towards year’s end)

(1 The information in this Outlook is presented as our expectations only and should not be taken as a recommendation or forecast: whilst we take them into account in our client-servicing decision-making, which is done in full knowledge of individual client circumstances. Others should not use them other than to note ‘by way of interest’.)

Why ContinuumFP considers Markets and Economic Outlooks

Because we are not involved so much as asset traders and are looking out for strategic management of client investments, the timing of any of the above outlook ‘events’ is not particularly important; and the degree of movement in any market volatility, whilst important in limited circumstances, is not particularly important in the longer-term: what we do seek to encapsulate in the application of the strategic investment of funds, is the market cycle; and market valuation-trends. In seeking to apply this we look for managers in whom we have confidence to be proactive in moving funds in timely anticipation of ‘knowable’ events.

Economic Outlook key-points for 2014

Our views as summarised in the above market outlook are based on the following expectations:-

Economically, we read consistently that global growth should be in the region of 3.3% to 3.8%, depending on the time and source of the information: the greatest challenges in this arena are likely to be experienced in the Emerging Markets and some Frontier Markets, as the capital flows associated with the US Fed’s tapering of quantitative easing adversely impact their liquidity.

We believe Japan might get one more good year out of Abenomics (subject to evidence of the policy working economically); China will continue to work through its transition towards a domestic consumer economy and generate around 7+% growth; Australia will ride the back of that, growing more slowly perhaps – and challenged by the possible threat of double dissolution (or a ‘stifled’ government with an uncooperative Senate); the USA to continue to grow, because of a growing sense of clarity – in spite of a start on ‘tapering’; the UK to grow – perhaps with some tightening during the year; Europe to continue working its way through its financial hurdles, successfully to a modest extent and continue growth. India and Russia we expect to have improving economies during 2014: India, as its economy continues to grow towards a stronger middle class and Russia as it continues to exploit its natural resources.

Whilst these outcomes will be generally positive for equity markets longer-term, they pose an element of volatility over the next 12 months, due to the need to remove non-conventional monetary policy stimulus (embark on tapering of quantitative easing – ‘QE’) as economic conditions improve. This is one of the unknown factors for 2014 and given that QE has directly provided significant support for ‘risk assets’ – particularly equities – over the last two years, it is likely to cause disruptions as the market tries to re-establish a degree of equilibrium based on fundamental views. The timing and the extent of removal will be the key drivers of market performance for the next 12 months.

Impediments to Outlook ‘predictions’

When we consider the issues that need to be taken into account in formulating our outlook, we are mindful of two elements that whilst they are ‘unknown knowns’, we are unable to envisage when they will impact the markets; and when they have their impact, how great that will be: they are –
• Geopolitical disturbances; and
• ‘factor X’.

Geopolitically, we are concerned about the Middle East (always has the potential to provide some ‘spark’); some of the emerging African nations; and Brazil, facing community unrest over the expenditures on facilities for the Soccer World Cup and for the Olympics, whilst leaving the poor and destitute without adequate consideration.

Factor X is called that because we don’t know what it will be, when it will occur, nor what impact it will have – either economically, or on the markets.