Re: [Pathway To Success] No 2, 15th Feb 2014 - 5 Financial Predictions for 2014

[Irena Whitfield]

Pathway To Success, Published since 2000
Volume 14, Issue No 2, 15th February 2014
Publisher Irena Whitfield
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Editorial:

Wonderful publishing Sunday, my loyal Readers!

Today's main article focuses on predictions for 2014,
which I find very important for us, entrepreneurs.

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Contents

  1. Today's Feature Article by Anatole Kaletsky
  2. Today's Tip On the Opportunity worth checking

Today's Feature Article

Five predictions for financial markets in 2014
Anatole Kaletsky, a columnist for Reuters

Happy New Year! For the first time since 2008, we investors,
economists and businesspeople say these words without irony.
While last year was statistically disappointing, with
global growth slowing slightly from 2012 and apparently
belying the optimism expressed here last January, the
verdict of financial markets and business sentiment has
been much more consistent with my predictions. Despite the
apparent slowdown, stock markets enjoyed their best
performance since the 1990s, long-term interest rates
soared and consumer confidence all over the world ended
2013 much higher than it started. This apparent paradox is
easily explained: the statistical weakness of 2013 was due
entirely to a very weak period last winter, connected with
the U.S. presidential election and leadership transition in
China. By the second quarter, growth had revived in the U.S.
and China and accelerated strongly in Britain and Japan.

That conventional wisdom last January was far too
pessimistic about the economic outlook is evidenced by the
subsequent behavior of financial markets, where equities
outperformed bonds by the biggest annual margin on record.
But today almost everyone is optimistic. So what unexpected
developments could surprise financial markets and business
sentiment in 2014? Below are five personal guesses - some
possibly far-fetched and others are seemingly obvious, but
none yet fully reflected in market prices:

1. Four is the new two.

I think the U.S. economy will grow by about 4 percent, much
faster than the 2.5 to 3 percent predicted by the IMF and
mainstream economic forecasts. My reasoning is simple. In
the last reported quarter, the U.S. economy was already
growing by 4.1 percent and the private sector by 4.9
percent. With U.S. budget battles now over and short-term
interest rates firmly anchored at zero, there is no reason
to expect a slowdown. If the U.S. accelerates to around 4
percent, so will global growth and 4 percent will replace 2
percent as the growth rate assumed in business and
financial planning. Global inflation expectations will also
rise to around 3 percent, raising the benchmark for global
growth in nominal terms to around 7 percent, very similar
to the 10 years before the 2008 financial crisis. In other
words, the "new normal" of global stagnation widely
predicted after the crisis will turn out to be not very
different from the old normal.

2. The big financial trends of 2013 still have a long way to go.

While the gains of over 20 percent in major stock markets
may not be repeated this year, equity prices in most of the
world should continue rising - and bond prices continue
falling. Stock market optimism seems justified for two
reasons. Wall Street has now decisively broken a 13-year
trading range and past experience, as described in this
column last March, strongly suggests that this breakout
signals the start of a bull market in global equities that
will last for many years. Shifting from history to
financial fundamentals, the 6 or 7 percent nominal growth I
expect in the global economy should translate into similar
growth in corporate revenues and earnings. That would imply
similar gains in equity prices, even without any increase
in price-earnings multiples or leveraging up of corporate
balance sheets through stock buybacks. Given that equity
valuations are still only slightly above long-term average
levels and that companies are flush with cash, there should
be scope for considerably stronger gains in many stock
markets.

The biggest problem for stock markets will be higher
interest rates, since 10-year yields will rise to at least
3.5 percent as the U.S. economy accelerates. But history
shows that stock market prices usually rise alongside
rising bond yields during periods of economic recovery,
provided short-term rates remain low. And luckily for
equity investors, the Federal Reserve will maintain its
commitment to zero short-term interest rates however much
the economy accelerates, because Fed officials see rapid
growth as a natural and welcome development after five
years of deep recession.

3. The European crisis will metastasize from economics
into politics.

Unfortunately European central bankers have a very
different worldview. They see rapid growth as a portent of
inflation and will start hinting at tighter money as soon
as economic conditions improve. The conflict between strong
growth and easy money has already appeared in Britain. It
will become a major political problem in 2014, because the
improvement in economic activity depends entirely on a
property boom that the Bank of England is trying (
unsuccessfully) to deflate. As a result, sterling will
continue to strengthen, central bank independence will come
under pressure and the British economy will become ever
more unbalanced, generating the world's biggest trade
deficit relative to GDP. In the euro zone, by contrast,
economic conditions will remain feeble at least until the
summer, when a shift towards more expansionary monetary and
fiscal policies will be triggered by panic in Germany about
the big victories for fringe nationalist and neo-fascist
parties in May's European elections. As a result, the euro
will weaken and the southern European economies will
finally start to recover, but not until the second half of
the year.

4. Japan will shoot itself in the foot - again.

Japan is the major economy most likely to disappoint
expectations in 2014, making a mockery of the optimism
expressed here last year about Abenomics. The consumption
tax increase in April will produce a fiscal tightening
worth roughly 2 percent of GDP, after allowing for some
feeble offsetting measures. As a result, Japan will
probably sink back into recession by the second quarter and
the stock market will fall sharply, even though the Bank of
Japan will try to ramp up its monetary stimulus and the yen
will probably weaken even more.

5. Emerging markets will make a comeback -
perhaps in unlikely places.

With the U.S. accelerating to 4 percent and China growing
steadily in the 7 to 8 percent range, emerging markets will
come into their own as investors realize that most of these
economies have more to gain from robust economic conditions
and stronger commodity prices than they have to lose from
slightly higher interest rates. There will, of course, be
exceptions. Financial problems may intensify in countries
with large trade deficits or political mismanagement, such
as Turkey and perhaps Brazil. On the other hand, two major
economies now treated as pariahs could do surprisingly well.
In Russia, the recent release of Mikhail Khodorkovsky could
signal a newfound respect for private property rights. And
a nuclear deal with Iran could bring this potentially
dynamic economy back into the civilized world, as well as
transforming Middle East geopolitics. But at this point, I
am probably getting too optimistic even for a New Year pipe
dream.


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