by Stuart Burns
Global equity markets have slumped, risk capital has been repatriated to the U.S. and commodity prices have retrenched. Is 2014 going to be a reverse of 2013, when the S&P 500 rose by 30% and Japan's Nikkei by 57%, while metal prices fell in the first quarter and then languished rangebound for the rest? Since January, more than $3 trillion has been wiped off global share prices, the S&P 500 is down by almost 5%, the Nikkei by 14% and the MSCI emerging-market index by almost 9%.
In a recent article, the Economist argues there is reason for optimism that January will prove to be a wobble, an appropriate adjustment to equity prices that had gotten ahead of themselves (the S&P finished 2013 at a multiple of 25 times ten-year earnings, well above the historical average of 16) rather than the start of a slump.
So will 2014 be boom, bust or in between? The magazine sees global growth exceeding last year's pace of 3%, with slower emerging market growth countered by stronger U.S., European and Japanese growth. The Economist also points out that America's economy is driving the global economy and, two months of harsh weather aside, 2014 is looking better than 2013 did at this time. America's economy was roaring along at a 3.2% pace at the end of 2013. The first few months of 2014 will be weaker than that, but in the magazine's view, average growth for 2014 still looks likely to outpace last year's rate of 1.9%.
Paradoxically, market jitters make bolder monetary action more likely in Europe and Japan, the Economist believes; with inflation in the euro area running at a worryingly low 0.8%, the European Central Bank needs to do more to loosen monetary conditions. That logic is even stronger in Japan, whose stock market has fallen farthest and where the economy will be hit by a sharp rise in the consumption tax on April 1. So more easing is on the cards. Continued loose money, across all mature markets, would support growth this year even as some emerging markets face a slump.
China, critically, may see slower growth in 2014 than previous years, but it has the firepower to avoid the slumps that are likely in, say, Turkey or Argentina, or even Brazil and India - where elections in April or May could see a resurgence of confidence and reform in an economy that has been in a decision-making deep freeze for the last year, pending a change of administration.
We are not talking about a boom, and risks certainly remain, but in the Economist's view, and ours, 2014 looks better than the current stock market sentiment is suggesting.