Earlier this week my colleague, Dominic Frisby, said he would give some predictions for 2014 in January.
Being a cheeky soul, I’ve decided to beat him to the punch and put out my predictions before him. Sorry Dominic…
My overall view is that 2014 will probably be a reasonable year for investors and there should be some decent money-making opportunities. I’ve highlighted some of my favourites below.
However, I’m not an all-out bull. Sure, there are always lots of thing to worry about. But with the valuation of the US – the market that most others take their cue from – so vulnerable to nasty surprises, I’m not going to pile in and invest every last penny in stocks and shares.
That said, here are my six big calls for 2014…
1. A good year for Japan
This is hardly a controversial stance in the MoneyWeek office, but I think Japan’s Nikkei index will rise by at least 10% next year, taking it to well over 17,000. I wouldn’t be surprised if the rise was actually much larger.
Valuations are cheap and policymakers are clearly determined to do whatever it takes to get the economy moving. That inevitably means massive money-printing, which can only be good for the stock market. And as John Stepek pointed out yesterday, there’s still ‘a surprising amount of scepticism’ among investors about the Japanese bull story.
If anything, the Japanese themselves are even more sceptical than foreign investors. Domestic investors have stuck with government bonds since ‘Abenomics’ began, but if the economy continues to grow, some of those investors will have to capitulate and switch into equities.
And that’s when share prices could really start to motor.
The only downside for UK investors is that the yen may well fall further at the same time, so you may want to hedge your exposure here. There are plenty of funds that hedge yen exposure, and I suspect more will become available as the Japan story grows legs.
2. Bank of England base rate will rise in 2014
This one’s a bit more controversial. The current consensus in the market is that the base rate will finally rise from 0.5% in mid-2015, but I think it will happen earlier – probably in the last three months of 2014.
This week’s encouraging unemployment figures suggest that the British economy is finally picking up real steam. If that’s indeed the case, inflation will almost certainly rise sooner or later too.
Granted, inflation has just fallen to a four-year low, but the UK economy always seems especially susceptible to inflation and I’m pretty sure that it will revert to type before the end of next year.
I’m not suggesting that prices will soar. But they’ll move up just enough to make Mark Carney nervous. And that means we’ll have a 0.75% base rate by Christmas.
3. Inflation will fall in the eurozone
Even although we’ll probably see a modest pick-up in UK inflation next year, it’ll be a different story in the eurozone. I expect the eurozone inflation rate to slow further, prompting increasing concern about the prospect of deflation.
That could force European Central Bank (ECB) boss, Mario Draghi, to launch a more aggressive form of monetary stimulus. So far he’s held back from full-blown quantitative easing (QE), but now that the German election is out of the way, QE – or something similar – looks like an increasingly feasible option.
In other words, the ECB will print plenty of euros and buy government bonds with long and short durations. That means you can probably still make money in eurozone shares this year.
4. Tesco will have another bad year
Tesco’s share price is down 16% since the summer. But don’t expect a recovery in 2014. This is a company with serious problems. It’s losing business at the bottom end of the market to Aldi and Lidl, while it struggles to compete with Waitrose at the top end of the market.
What’s more, large out-of-town hypermarkets are no longer the asset that they once were. In fact, we may even see them as white elephants before too long. So if you want to invest in retail, go for Next (LSE: NXT). It has a management team that keeps on getting it right, unlike Tesco.
5. The BJP will win the Indian election
The opposition BJP will win the upcoming Indian election. That should mean renewed economic reform and a resurgent stock market. India is hardly cheap at the moment, given its woes over the past year, but if you’re holding on to it, stay invested.
6. Ed Miliband will sack Ed Balls
I can’t resist one purely political prediction. I reckon Ed Miliband will move Ed Balls from the Shadow Chancellor job next year. We know that Miliband is a pretty ruthless individual – he knifed his own brother after all – and Balls is now clearly a liability.
Shadow Home Secretary, Yvette Cooper, would be an excellent replacement in many ways, but she probably won’t want to take her husband’s old job. So that means either Alistair Darling or Chuka Ummuna will get the job.
The big worries
I said at the beginning of this article that I’m not an all-out bull. Obviously lots of different things can go wrong, but right now there are three issues that make me especially nervous.
Firstly, I worry about how the US would react to a more serious taper than we’ve seen so far. Given Janet Yellen’s apparently relaxed attitude towards inflation, I can’t see the Fed getting a lot more aggressive, but never say never.
Secondly, I’m concerned by the fact that European banks still haven’t really been ‘cleaned up’ to the extent that has happened in the US. If the tangled politics of Europe get in the way of dealing with this problem, it could potentially lead to another flare up of the eurozone crisis.
And finally, when there’s so much debt across the world, and vast amounts of ‘printed’ money sloshing around, you just can’t be an unreserved optimist. When markets remain this sensitive to the actions of central banks, you can’t take anything for granted.
Still, I’ll try to hold my nerve – and hopefully make some decent profits from Japan.
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