2013: Stock markets at highs but can they do it again next year?
- 23 December 2013
- From the section Business
Well, it all seems fine and dandy when you look at the numbers: the Dow Jones Industrial Average up 22%, the S&P 500 gained 25% and the Nasdaq up 33%.
In Europe, the FTSE was up 10% and the Dax 22% higher. Even Greece rose 27%.
And just take a look at Japan: a 58% rise in the Nikkei. From the major share indexes, it looks like we can draw a line under the global financial crisis and say it started in 2008 and ended in 2013. Five bad years we can say goodbye to.
Japan and Europe
Let's start with that rise in the Nikkei. Take a closer look. In dollar terms, the stock market rise was less than half the local currency rise.
The reason was, in short, Abenomics, the economic policies of Shinzo Abe, the prime minister of Japan, in power now for a year and responsible for the biggest quantitative easing (QE) programme in the world.
It has slashed the value of the yen against the dollar by a fifth and flooded the economy with cheap money. The result has been a boom for the stock market, specifically exporting stocks such as Mazda, Softbank and Fuji Heavy Industries, all of them up between 170-200% in yen terms.
But according to Jane Foley, senior foreign exchange strategist at Rabobank, "There is still a massive battle ahead and the rises we are seeing in consumption may not stay."
In contrast, the strong currency of the year has been the euro, which "has been surprisingly resilient".
She says: "The eurozone has moved from crisis to a politically cohesive response and has also created a massive current account surplus, generated largely by Germany. All that has strengthened the euro. At the beginning of the year most analysts thought the dollar/euro rate would be around 1.27. Today it's closer to 1.37."
So why has the euro been so resilient?
"There was one big problem," says Holger Schmieding, the chief economist at Berenberg Bank. "There was no lender of last resort, and so a small problem like Greece spread to the whole eurozone.
"Ever since the European Central Bank has established itself as a lender of last resort, everything has gone right. Spain is growing, Germany is growing, Ireland and Portugal are growing."
And their stock markets reflect that. A 30% rise in Ireland's main index, a 17% rise in Spain's Ibex, and 13% for Portugal.
As for the UK, by the fourth quarter it suddenly became obvious that the economy was recovering faster than anyone imagined.
Most analysts are now forecasting that the UK will be the fastest-growing economy in western Europe in 2014, though its budget deficit will remain the second highest in the G20.
Bank of England governor Mark Carney is being as ambivalent about the tightening of monetary policy as Ben Bernanke over in the US. But the market response to the UK's economic good fortune has been muted.
There is a growing feeling that much of the good news has been priced into the market, and further gains will require a great deal more good news.
And so to the winding down of QE in the US.
Anyone who has been following this will be familiar with the topsy-turvy world of "tapering" - the better the economic news, the more likely the Fed will rapidly cut its $85bn (£52bn) monthly support for the economy, the more disheartened investors become. So conversely, the worse the economic news (within limits) the happier they feel.
Now tapering is about to start, stocks appear sanguine with the whole concept of a $10bn reduction every month. But Nick Beecroft, senior markets consultant at Saxo Bank, is worried "it's too easy to be sanguine about it all".
"Everyone appears to think everything in the garden is rosy, and I am troubled by that consensus," he says.
He points to what he calls "icebergs" - things that could go wrong in the coming year - such as a resurgence of the eurozone problems, a conflagration in the North China Sea, a too-hot-to-control economy powered by inflation and a dip in Chinese growth. All of these he puts at a 15-20% chance of happening.
The China growth story has taken something of a knock over the last year, but appears to be back on track with GDP at around 7%. But not everyone is convinced.
Ruchir Sharma, head of emerging markets at Morgan Stanley Investment Management, wrote a powerful article for the Wall Street Journal in October questioning the accuracy of the economic figures and suggesting that Chinese Premier Li Keqiang himself considered the public figures "man-made" and actually used more eclectic measures of growth, dubbed the LKQ Index.
Justin Urquhart-Stewart, co-founder and director of Seven Investment Management, says the country is going to be very volatile as it changes from an export economy to a service economy.
"We all know that service is not a byword in China," he says. "The economy will continue to grow but the graph will not rise at that relentless 45% angle that we are used to."
Mr Urquhart-Stewart also points out that 2013 really saw the death of the Bric countries as an investment concept.
"What on earth was there that was similar about Brazil, Russia, India and China? They were put together under this umbrella by Goldman Sachs to help them sell their funds.
"On 22 May, the first indications came that the Fed would reduce its support for the US economy and it showed all those pompous Western asset managers that there were many different classes of emerging markets as funds flew out of them.
"Russia, India, Indonesia and Brazil fell like a stone. And then by the end of the year we see the ones that have done well - like South Korea, Mexico and some African economies, which are all looking good."
So currencies apart, returns have been good for 2013, but while few see a collapse of confidence, markets may struggle to find news that inspires them on to greater heights.
We're only just out of the worst recession since the 1930s, and many of the biggest markets are at all-time highs. That alone should be reason to be cautious.