Economic and asset allocation views covering Q1 2014
14 January 2014
The final quarter of 2013 saw a revival in risk appetite with US equities making new highs whilst, after an initial rally, bond markets generally sold off. Fixed income yields began to rise as optimism about the global economic recovery increased and, not insignificantly, politicians in the US reached an agreement over the debt ceiling and brought an end to the shutdown which had paralysed government. It remains to be seen how long the new spirit of compromise will persist in Washington, but the signs are good that an agreement will be reached over the debt ceiling ahead of the February deadline.
We would expect more volatility as the year progresses as we see the US economy gradually normalising, putting pressure on the Fed to do the same with monetary policy.
Meanwhile, investors are focussed on the implications of the Federal Reserve’s (Fed) decision to start tapering bond purchases. So far the reaction has been benign, although this owes much to the earlier sell off in bonds and emerging market currencies which dominated last summer. We would expect more volatility as the year progresses as we see the US economy gradually normalising, putting pressure on the Fed to do the same with monetary policy. This will have implications for sectors and markets and suggests some rotation in leadership as investors begin to re-focus on expansion and growth rather than yield.
At the global level the picture is complicated by the divergence between economies as the rest of the world is lagging behind the US. For example, Europe will be pre-occupied with banking reform whilst Japan must withstand a severe tightening of fiscal policy. As a result, monetary policy is likely to remain easy or ease further in these regions, resulting in a divergence with the US. Meanwhile, as highlighted in the last global market perspective, the emerging markets face a number of on-going structural challenges to revive growth.
Along with a summary of our asset allocation views, we discuss the implications of these developments in the Strategy note after a review of market performance during 2013. We also take a closer look at forward guidance and bond market volatility in the research note.
We wish all our readers the very best for 2014.
Keith Wade, Chief Economist and Strategist, Schroders
Important Information: The views and opinions contained herein are those of Schroders’ Investment team, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results. The value of an investment can go down as well as up and is not guaranteed. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. Regions/ sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this material include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change. UK: Schroder Investment Management Limited, 31 Gresham Street, London, EC2V 7QA, is authorised and regulated by the Financial Conduct Authority. For your security, communications may be taped or monitored. Further information about Schroders can be found at www.schroders.com US: Schroder Investment Management North America Inc. is an indirect wholly owned subsidiary of Schroders plc, a SEC registered investment adviser and is registered in Canada in the capacity of Portfolio Manager with the Securities Commission in Alberta, British Columbia, Manitoba, Nova Scotia, Ontario, Quebec and Saskatchewan providing asset management products and services to clients in Canada. 875 Third Avenue, New York, NY, 10022, (212) 641-3800. www.schroders.com/us