The Week In Hindsight, 02 January 2014

After averting the much anticipated hard landing of the economy during 2013, Chinese equities are now widely forecast to outperform this year given that economic growth has stabilised.

Whether or not the individual investor should take that turn in sentiment as a cause for concern remains to be seen however; the current consensus is not for imminent destruction within the world’s second largest economy.

This positive sentiment should help to cement confidence in developed market stocks throughout the year as healthy forecasts for the Chinese economy generally indicate expectations for calm conditions in developed markets.

Info-graphics by JP Morgan Asset Management

EMERGING MARKETS SEE OUT A YEAR THEY WOULD RATHER FORGET

Emerging markets proved to be the ugly duckling during 2013 as growth returned to developed markets. Many EM stocks, currencies and bonds have suffered terribly given anticipation throughout the year that at some stage the Federal Reserve would begin to slow the pace of its stimulus program.

Info-graphics by JP Morgan Asset Management

Now that the Federal Reserve has taken the plunge and opted to commence tapering operations there appears to be a general consensus among many investors that this year could be no different to last for the already beleaguered junior markets.

Most of the bearishness that surrounds emerging markets is derived from concerns over the fiscal position of EM governments. This is because, with rates at historic lows across developed nations, EM governments have enjoyed low costs to funding for some years now. Present deficits indicate that such governments have not been shy in helping themselves to the banquet table. As a result, a dependency upon cheap funding has now developed across in some areas.

With the macroeconomic environment changing and rates now beginning to rise in the west, there is less of an incentive to invest in riskier emerging market debt securities such as government bonds. This implies rising EM bond yields, which makes current levels of spending unsustainable and thus poses a significant threat to growth in these nations.