A Macro View of 2014

Let me begin this article by stating that I am definitely not a macro economist. However, the macro environment does provide the context in which investors place their bets and periodically, I like to take a step back from individual investments and think about the main macro factors that are likely to present either threats or opportunities and also to consider the main trends for the year ahead.

I recall a conversation I had back in the early to mid-90s, when the FTSE 100 was around 3500, with a major fund manager of the day. He was very bullish that the UK’s benchmark index would go past 7000 by the time the decade was through. It never did quite make it, peaking at 6950 at the end of 1999 before slumping back below 3500 in 2009 following the banking crisis and global meltdown. On 3rd January this year it closed at 6730.

Will 2014 be the year that the FTSE finally breaks through the 7000 barrier?

I think there is a good chance that it could do so. Although rising 14.4% during 2013 (slightly more at its mid-year peak), strong earnings growth is expected from British companies in the year ahead. At some point, interest rates will need to rise as unemployment falls and inflation rises – whether that is in the second half of 2014 or sometime in 2015 remains to be seen. For now, it seems that established UK companies will be able to make hay while the sun shines.

Early indications are that selective retailers have had a good festive period while others have struggled. I can see this trend continuing with quality being the watchword for successful stock picking in this sector. I can see house builders and property companies having continued success in 2014, thanks to government support for the sector and improving commercial demand. I also think the business-to-business sector will have growth opportunities but again, individual stock selection will be key and we should not forget that smaller companies in particular, are still finding it difficult to raise debt finance. Although it is anyone’s guess what the next scandal to hit the banking sector might be, I can also see a broadly good year ahead for banking shares.

A large proportion of my own investments these days are focused on resource stocks. Underlying commodity prices might continue to present a barrier. The three that are of particular interest to me are oil, iodine and gold. Of these three, iodine is possibly the easiest to predict an increase during the year as inventories are reduced, supply problems prevail (not least the geopolitical problems in Chile) and demand for both existing and new applications continue to strengthen. The gold price seems set to continue downwards for the time being but it might reach its low point during the year and then I believe there will be some decent bargains to be had – I will be watching this sector closely. The oil price remains difficult (for me at least) to predict, especially with an increased supply coming from the US. I would be happy with a flat year, although I would also be pleased to see a rising price of course. The three oil companies I am primarily interested in are all current oil producers with some decent exploration potential, so the price of oil is material to their success in 2014.

Looking beyond these shores becomes more challenging. The US should continue on its growth curve with QE reducing during the year so I see an upward trajectory for markets but with plenty of volatility along the way. The Eurozone countries might continue to flat line but hopefully the outlook will improve as we go through the year. China, Japan, India and emerging economies such as Brazil (where there is a World Cup this year followed by an Olympics in 2016) will all continue to have an increasing impact on UK markets and companies but these are factors that I tend to look at on a company-by-company basis when there is a material impact on the investment case.

It is perhaps folly to make too many predictions at the beginning of a calendar year but I find myself unable to refrain completely.

1. FTSE 100 to break through 7000 during the year and hopefully to end the year above too.

2. Iodine price to end the year above $60 per kg.

3. Gold price to fall below $1050 but to reverse before it hits $1000.

4. There will be winners, losers and surprises along the way, so individual stock picking backed up by solid research will continue to prevail.

5. UK interest rates to begin rising before the end of the year.

I wish everyone a happy, healthy and prosperous 2014 – let the fun begin.