Berenberg Outlook for 2014 “Financial markets still have upside potential”
- Eurozone economy can gain momentum
- Berenberg forecasts solid growth in the UK, with 2.6% in 2014
- Scotland and EU referenda not expected to result in disaster scenario for UK
- FTSE forecast to reach 7,300 and DAX to reach 9,800 by end of 2014
Hamburg/Frankfurt. After a good year for equities in 2013, Berenberg is cautiously optimistic about the future. Countries in the western world are increasingly emerging from the shadow of the major financial crisis. “As the euro crisis fades further, the economy in the euro area can gain momentum over the course of 2014. As before, Germany will be among the front-runners,” says Dr Holger Schmieding, Chief Economist at Berenberg. The constellation of low interest rates and a slowly resurgent business cycle is fundamentally auspicious for financial markets. “Even though the equity markets in particular have already priced in much of this in 2013, we still believe our positive economic outlook leaves some upside potential for financial markets,” says Stefan Keitel, Global Chief Investment Officer at Berenberg.
As the turbulence diminishes, households, companies and banks in western countries are becoming less focused on parking their money in safe harbours at low returns rather than investing it profitably. Monetary policy is gaining traction and beginning to drive an upswing, especially in the USA, the UK and Japan. “We expect this upswing to gain momentum in 2014 in the USA and the UK, although the super-sized stimulus could gradually evaporate in Japan if the country does not boost its growth potential by making fundamental structural reforms,” adds Schmieding.
Forecast for the UK
The UK is on the cusp of a strong recovery. With uncertainty falling rapidly, confidence returning, and house prices surging we expect growth of 2.6% in 2014 and 3.0% in 2015. The Bank of England can afford to let the economy grow above trend for a year or two. But they need to take action on the growing housing market boom. We do not expect the forthcoming referenda in Scotland and on the UK’s EU membership to result in the disaster scenario of a rump UK locked out of its main export market. But it is a big risk hanging over the outlook.
The upswing has also materialised in the eurozone, although the pace has initially been moderate. Consumers and companies are regaining confidence. They believe once again that the currency union will survive and are preparing for a better economic climate. The policies of austerity and reform in the peripheral European countries are also bearing fruit. Furthermore, fiscal policy is no longer weighing on the entire euro area to the same extent as in prior years. “We expect the economy in the eurozone to pick up speed; after two years of falling economic output we are predicting growth of 1.2% for 2014. Germany can achieve an increase of 2.1%,” says Schmieding.
However, the risks remain significant. If the German Federal Constitutional Court should hold that the European Central Bank’s monetary policy is illegal, for instance, this might provoke a fresh bout of turbulence across Europe. In the USA the next round of the budget dispute is probably just around the cor-ner. Altogether, however, the risks are less severe than a year ago.
Capital market forecast for 2014
Many of the important share indices have reached highs for the year in recent weeks or are close to their all-time highs. Whereas global share markets have risen slightly or moved sideways, volatilities have generally declined even further. In the short term, Berenberg sees no significant catalysts for further increases. “We are expecting some visible setback for equities by the first quarter of 2014 at the latest, but for investors with a medium-term investment horizon these should also represent opportunities to buy,” says Keitel. Given the positive overall economic situation, the longer-term outlook for stock markets remains favourable, however. “The very modest increases in interest rates and returns and a lack of convincing investment alternatives should give stock markets a further boost in the second half of 2014 if the economy continues to accelerate,” explains Keitel. “From a valuation point of view we prefer selected Emerging Markets, the UK and the Eurozone markets, with all these market still showing high catch-up potential. Asset values of a more defensive character have risen less than cyclical securities at times. For investors taking the long-term view, and irrespective of the sector, we recommend equity in companies with a sustainably successful business model, dominant market share and visible growth rates, high returns on capital and strong cash flow for attractive long-term dividend yields. Selected automotive shares and technology companies also make promising investments, in our opinion.”
If the Fed begins to taper its bond purchases in spring 2014, Berenberg predicts a yield of 3.2% for 10-year US Treasury notes as of mid-2014. By the end of 2014 it is expected to climb to 3.5% as the US economy accelerates. For 10-year German Bunds Berenberg is forecasting a yield of 2.10% as of mid-2014. If the economy in the eurozone recovers sustainably, yields could then rise to 2.5% by year-end 2014.
Berenberg still considers corporate bonds to be attractively priced. The positive overall economic environment and decent spreads over German Bunds argue in favour of this asset segment. High-yield bonds as part of bond funds still offer interesting returns, although these securities have already risen substantially and the spread over government bonds is rather low from an historical perspective. Financial bonds should also develop positively. Hard-currency bonds from emerging markets remain attractive from a return perspective. All in all, net borrowing by governments and companies in emerging markets should stay stable or even decline slightly. Credit ratings should remain intact.
Alongside traditional asset classes like equities and bonds, alternative invest-ments can tangibly improve the risk-reward profile of a portfolio. The low correlation between certain segments and traditional asset classes contributes to a sensible diversification of risk and can reduce a portfolio’s overall risk.
Director Corporate CommunicationKarsten Wehmeier
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