How will the markets perform in 2014?

As one year closes and another begins, it is instructive for investors to look back on 2013 and see how the markets performed.

In London, the FTSE 100 recorded its biggest annual gain since 2009. The index closed up 17.82 points at 6,749.09, taking its rise for the year to 14.4%. That was the FTSE 100’s strongest annual gain since 2009. The FTSE 250, meanwhile, ended the year at an all-time closing high of 15,935.35, up 34.61 points on the day, and 28.8% on the year.

Whilst this is good, in some areas the markets performed even better.

Across the pond, the Dow Jones ended 2013 up 23.6% over the year, its biggest annual rise since 1995. The broader S&P 500 rose 26.4% on the year, its strongest rise since 1997.

In Europe, stock markets benefited from a revival in US investor confidence in both the region’s economy and political stability. It led to US fund managers pouring money back into European equities. The DAX in Germany ended 2013 up 25.5%, Spain’s IBEX rose 21.4%, the CAC 40 in France advanced 18% and Italy’s FTSE MIB gained 12.3%.

Elsewhere, Japan’s Nikkei 225 was boosted by Abenomics and the massive economic stimulus programme and leaped up 56.7% – resulting in its best year since 1972. However, the emerging markets – which had been benefiting from the loose monetary policy pursued by the Fed – have fared less well, with Brazil’s Bovespa index, for example, slumping 15.5%.

Against this, the price of gold had its worst year since 1981 as the US economy improved, inflation was held off and concerns about the financial system and gridlock in Washington faded. Gold dropped 28% in 2013. The price peaked at $1,900 an ounce in August 2011 and has been declining steadily ever since.

So how will markets fare in 2014? Funnily enough, most economists are pretty optimistic about 2014, which on past form could be a dangerous sign!

That aside, most pundits expect the FTSE 100 to continue to do well, with many predicting that it will go higher than its previous record of 6,930 which it set in 1999 and almost breached last May. The consensus is that it could also be a good year for the large-cap stocks as well, which have performed less well than the small and mid-cap stocks of late.

Most analysts also believe that the US is looking good. The recent announcement of the first “tapering” of monetary stimulus was so dressed up with words of reassurance that the result was to send stocks soaring, to cap a great 2013 for the US markets. It will be a tough act to replicate the returns of 2013 this year – and a few pundits feel the US stock market is too highly valued - but the optimistic view of most does not look too far wrong.

Europe overall had a good 2013 and yet valuations of European shares still remain cheaper than in most parts of the developed world. Whilst the stigma of the ‘Eurozone crisis’ is hard to shake off, many European companies are doing well, are making good profits and have large amounts of cash. So Europe could surprise a few.

By way of contrast, the views on Japan are more mixed. After a stonking first six months, the Nikkei has plateaued, as it seems not everyone is convinced whether Prime Minister Abe’s three arrows of monetary and fiscal stimulus and economic reforms will provide the platform for sustainable growth.

Certainly, Japan still has the highest debt to GDP ratio in the developed world – and whilst the devaluation of the yen is good news for Japanese exporters, it is not so good for UK investors whose holdings will fall if the currency weakens further.

Emerging markets in general disappointed in 2013 and problems remain. Some of the problems include concerns about the ‘shadow banking’ system in China, currency falls triggered by current account deficits in India and Indonesia and general fears about the impact of the US tapering measures on demand for shares in emerging markets generally. Against this, emerging markets are trading at near record low valuations so, taking a longer-term view, you could see outperformance in this sector once again.   

Overall then, the world economic recovery does look as if it is under way in earnest and one way to benefit would be to consider a well-managed global fund to tap into the broad based recovery.

Of course, whilst the above comments may be useful in general terms, any investment decisions you make should relate to your own individual circumstances and financial objectives.  

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