As investors get back to their desks following the new year splurge, Rob Morgan of Charles Stanley Direct picks out his six key risks for 2014.
2013 turned out to be a great year for many investors. An improving economy, buoyant equity markets and plenty of successful flotations, notably Royal Mail, have given the start to 2014 an air of confidence. Markets like to climb a “wall of worry”, something ably demonstrated over the course of last year. Yet now asset prices are higher, the risks are greater, and some of those worries haven’t gone away. While momentum seems to be behind the market, meaning 2014 could also be a decent year, I will be keeping an eye on the horizon for any looming risks, the key ones in my view being the following:
Risk #1: US Treasury yields rise further
Equity markets rallied at the end of 2013 as the US Federal Reserve announced it would taper quantitative easing, but that interest rates were still a long way from rising – they are now tied to unemployment figures rather than inflation. However, markets could be less relaxed if US inflation surprises significantly on the upside. Although this might be a sign of the economy improving more quickly, any heavy selling of US Treasuries could result in higher yields, likely denting bond and equity markets around the world.
Risk #2: Earnings don’t live up to expectations
The prevailing view is that economic growth is sufficient to allow corporate earnings to rise and inflation expectations will remain mild enough for central banks to maintain an accommodative stance. Yet earnings could disappoint if growth turns out to be weaker than anticipated. A number of fund managers are telling us that decent earnings growth is already factored into prices – it needs to come through for equity markets to continue forward momentum.
Risk #3: UK inflation scare
Like the US, UK interest rates are increasingly linked with jobless numbers and we don’t expect them to go up before mid 2015. Yet investors should not take this for granted. Weakness in oil and other commodity prices combined with a strengthening pound over the course of 2013 may have given us a false sense of security with regard to our own inflation numbers. If these trends reverse, Governor of the Bank of England, Mark Carney, may have to make the uncomfortable decision to…
