The outlook for financial services in 2014
Speculation is always a hazardous game in financial services, but as George Lucas explains, this year the odds are stacked in favour of growth and prosperity.
Predicting the financial future is always fraught with danger. Just think how many analysts, economists and fund managers sat back in their well-padded chairs at the end of 2007 and painted a rosy picture for 2008.
Even though there were portents in 2007 of what was to come in 2008, there was still an air of optimism in the markets.
But as the year unfolded those forecasts were to assume about as much reality as a religious cult predicting the end of the world.
So with that caveat out in the open, let’s get out the crystal ball and put our reputation on the line. For on the line it is.
As the famous American founding father and scientist, Benjamin Franklin, said, “It takes many good deeds to build a good reputation, and only one bad one to lose it”.
If one word sums up my thinking about 2014, it’s “bullish”. Perhaps not as bullish as I was this time last year, but, nonetheless, I am confident most of the major equity markets will finish on a higher note.
At home I expect the Australian economy to slow slightly, although it’s still likely to be performing better than most other developed economies.
Even if China slows to 7 per cent growth (how the US and Europe would love to have half that), the past year has shown that demand for our exports to the world’s most populous country has not been greatly affected to date, so demand for our exports is likely to continue in 2014 in the double digits.
Added to this is better news coming out of Japan. “Abeonomics”, while slow and steady, seems to be working, which is good news for Australia because it is our second biggest trading partner and can help pick up some of the slack if demand from China does wane.
Our currency and equity markets, as always, will often find themselves at the mercy of what’s happening overseas.
In 2014, the biggest event is likely to be a US paring back its bond buying and the subsequent fallout as global capital flows adjust to the Federal Reserve removing itself from the capital markets. That said I still anticipate the share market to be around 6200/6300 by this time next year.
The Australian dollar is simply too hard to predict; left alone it would probably rally but the Reserve Bank is anxious to see it lower, so interest rate cuts are still a possibility despite stronger signals about housing and retail sales.
The US, of course, remains the joker in the pack. The economic data that rolls out of Washington and New York is still giving mixed signals, but I am in the camp that says the US, after a very slow recovery post the global financial crisis, is finally getting its house in order, a precarious fiscal situation notwithstanding.
It’s my opinion the markets are continuing to underestimate the strength of the US economy, and, on the back of this, I predict the S&P500 to be above 1900 by 2014 year-end and probably closer to 1950, even allowing for a possible 10 per cent retreat in the US equity market sometime during the year.
The removal of quantitative easing will cause some volatility, but the Federal Reserve has indicated it will add other easing measures to assist with the transition and continue to provide forward guidance on interest rates – lower for longer.
In that environment expect bond funds to under-perform, and that will continue to push money into US and global equities.
Europe still remains the poor cousin relative to the US and other developed countries; a growth rate that might reach circa 1 per cent – hardly enough to put a dent in its sizeable unemployment problem – would still be an improvement.
European markets should continue their rally but at a slower pace than 2013. But because they are coming off a low base they will probably still outperform the US.
Europe, of course, is a mixed bag. Germany and UK are likely to be the stand-outs enjoying growth more in line with the US, while most of the PIGS (Portugal, Italy and Greece) will continue to struggle. A helping hand could come in the form of a lower oil price.
Well, that’s my thinking. The harsh truth is my view could prove to be just as “informed” as those experts in 2007. But let’s hope not. For if I have it right, 2014 should indeed end with a merry Christmas.
George Lucas is the managing director of Instreet Investment.
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