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
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