There was a British weather forecaster, Michael Fish, who gained notoriety in 1987 on the eve of what was to become one of the largest storms ever to hit the UK, when he opened his bulletin by saying: "Earlier on today, apparently, a woman rang the BBC and said she heard there was a hurricane on the way ... well, if you're watching, don't worry, there isn't..."
It wasn't quite career suicide, but it was certainly a lesson in being emphatic in the face of uncertainty. And there is an overwhelming temptation when making predictions about equity markets to avoid the emphatic. Furthermore, the very nature of looking forward to a new year implicitly suggests that what lies ahead will be different to what we are leaving behind. For equity investors in 2014, this may not be the case: we are currently in the midst of a synchronized global economic expansion, albeit a rather tepid one, and in our opinion all the evidence suggests this is likely to continue. In the eurozone, 2013 became the year when conditions moved decisively from ongoing deterioration to at the very least becoming ‘less worse’, while a recovering housing market has been key to the return of UK consumer confidence. In the US, forced reductions in government expenditure have certainly impacted growth rates, but on balance the US economic recovery is increasingly broad-based.
For equity markets to rise meaningfully, however, we would argue that the expectation of growth in corporate profits needs to become a reality. Profit margins are at all-time highs in the US, but there is room for a meaningful recovery in Europe and Japan. It would be our expectation that after five years of aggressive cost-cutting in Europe – and longer in Japan – that any top-line recovery leverages into some more impressive bottom-line growth. This could positively surprise not just investors, but in some cases management teams too, given their much needed aggressive focus on costs during recent tough economic times. However, with valuations having already increased in anticipation of this, any disappointments here mean negative consequences.
Forecasting the weather is a challenging occupation. From what we see, however, largely informed by the hundreds of company management meetings that we conduct globally, we think the weather is set fair. There are those who are warning there is a storm called deflation coming our way. But for now, don't worry, there isn’t...
Opinion column by Matthew Beesley, Head of Global Equity, Henderson Global Investors