International outlook 2014
Today we at Bourse take a closer look at the global economic prospects for the international equity markets for 2014.
As 2013 draws to a close, international analysts and investors alike remain cautiously optimistic for 2014. There is a general positive outlook for the global economy in the year ahead, as the International Monetary Fund (IMF) projects a global growth rate of 3.6 per cent for the upcoming year, up from the 2.9 per cent forecast for 2013.
Third quarter (3Q2013) Gross Domestic Product (GDP) accelerated to 4.1 per cent, the biggest gain since 2011, with the Federal Reserve projecting GDP growth between 2.8 per cent and 3.2 per cent for 2014. During 4Q2013, the US has experienced positive results in terms of employment, housing and corporate earnings. A primary risk to the performance of the US is the debt limit deadline which is scheduled for February 7, 2014, when it would be decided whether the debt ceiling- currently at US$16.7 trillion- will be expanded once again.
The latest Fed meeting held on December 18 revealed that QE tapering is to begin in January 2014, when monthly bond purchases will be reduced by US$10B to US$75B while policy interest rates will be kept near zero until the unemployment rate falls below 6.5 per cent (Unemployment currently stands at 7 per cent). Fed officials maintain that it is unlikely that interest rates would be raised until at least 2015.
Driven primarily by liquidity, the S&P Index reached record highs in the latter half of 2013. Analysts’ outlook on the S&P index targets for 2014 can be seen in Table 1.
Emerging Markets (EM) are forecasted to grow at a faster rate than advanced economies and the world in 2014. The IMF projects a growth rate of 5.1 per cent for EM, well above the 3.6 per cent growth projected for the world.
China is embarking on a period of key reforms (Third Plenary) to address deep-seated structural issues and to pursue economic growth in the long-term. The general consensus is that these reforms are expected to positively impact the returns from Chinese equities. The IMF projects GDP growth for 2014 at 7.3 per cent (see Exhibit 1).
2014 China growth forecasts from several investment houses are estimated to be around 7.8 per cent. A survey of four top international houses suggests growth in the equity index from current levels (as at December 19) in the range of 10 per cent and 39 per cent.
India looks ahead to general elections in May 2014 and with it comes positive expectations for the Indian market. The outcome of the state elections held in the last two months of 2013 saw opposition winning 4 key states, is seen as precursor to the national elections next year and indicates a high likelihood of a change in government. The political change is anticipated to improve the business environment, creating a positive effect on financial markets. The IMF projects a GDP of 5.1 per cent in 2014, up from 3.8 per cent in 2013 for the second largest Asian economy.
On these expectations, analysts have turned bullish on the Indian space and see further upside in 2014. From current levels as at December 19, India’s major equity indices are expected to experience an upside in the range of 12 per cent and 16 per cent based on a survey of major international research houses.
The Indian Rupee is expected to remain range-bound between 61.5 and 63.5 rupees per dollar over the 1st quarter of 2014.
Brazil’s Central Bank has projected economic growth of 2.3 per cent for 2013 year-end and 2.01 per cent in 2014. These estimates represent an increase from the 1 per cent growth recorded in 2012. Brazil’s Finance Minister is confident that the economy will perform better in 2014, in line with the general upswing of the global economy. He also noted strong consumer market and favorable unemployment levels of 4.6 per cent.
It is expected that the Central Bank could possibly raise the Selic rate from 10 per cent by 25bps to 50bps in the coming year. The Central Bank also plans to implement a Currency Intervention Programme in June 2014 in order to address volatility of the real.
Brazil looks forward to hosting the 2014 FIFA World Cup and 2016 Summer Olympics, both of which can potentially boost growth in the economy due to related infrastructural developments and gains from increased tourism activities.
Mexico’s Central Bank revised its outlook for 2014 in which they now expect a significant recovery with economic growth of around 4 per cent from 1.2 per cent in 2013. A key positive development for the Mexican economy is the legislation recently passed to open up the energy sector to international oil conglomerates in order to boost oil production and stimulate growth. As a result of the progressive reforms in that country, S&P has raised Mexico’s credit rating from BBB to BBB+, now in line with Moody’s and Fitch ratings. Mexican equities stand to gain in the coming year, with the Mexican Stock Exchange (MEXBOL) projected to experience an upside of 7 per cent from current levels as at December 19th, based on surveys conducted.
Looking at the region, Latin America continues to appear attractive considering the price/earnings ratio (PE) of the respective markets compared to their 5-year average. Equity returns are expected to be driven by growth in the coming year (see Exhibit 2).
Emerging Markets are expected to be the drivers of global growth for 2014. New reforms and policies are expected to help insulate these vibrant economies from external shocks while encouraging growth.
With sentiments being positive for 2014, global corporate earnings forecasts and market valuations continue to present opportunities for investors in the international space.
Investors should, as always, be vigilant when making any investment decisions and they are invited to seek the advice of licensed investment advisors of which Bourse is one of the largest, independent players.
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