It’s that time of the year where I look at my pension holdings and decide where to place my bets. For the last couple of years the focus of my investments have been in global equity funds and they have done rather well. But with the big gains in 2013 (23%) , I moved everything into money market funds late in 2013, so missed out on the Santa Rally, though I avoided some of the emerging markets sell off. But with the Ishares MSCI world ETF up 22% for 2013 a reasonable performance. Though with the benefit of hindsight, a big bet on the S&P 500 and Nikkei 225 would have been the way to go.
After reading endless articles over the last 2 weeks, I am certainly more bullish on the U.S. market in particular, though am still not convinced for the case for a contrarian punt on emerging markets, gold or resources (with the exception of oil). The easy money has been made from the financial crash of 2008/2009, now it is going to be harder. Double digit gains are going to be tough to find without taking some risk. Corrections will come in 2014, so the big question is when to commit? Whereas throwing darts at a board would have made you money in 2012 and 2013, the equivalent of sticking your cash in index tracking ETF’s, stock selection and special situations are the key for 2014/15.
The case for the U.S. market
The American economy looks to be in pretty good shape and so it should be after all that Federal Reserve stimulus – trillions of dollars of it! U.S. GDP grew a revised annual rate of 4.1 percent in the third quarter, the fastest pace in almost two years, with the unemployment rate at 7 percent, a low for the Obama Presidency.
Forecasters are predicting continued above-trend growth in the U.S. to occur in 2014, with corporate earnings driven by increasingly bullish consumer and industrial demand. The IMF forecasts GDP growth of 2.5% for the US economy in 2014.
Despite further tapering by the Federal Reserve as the economy improves, the Fed have signaled that interest rates will remain near zero until probably late 2016 or 2017. Money has never been so cheap. Bernanke has made a point that markets should not expect the central bank to tighten rates any time soon. The same can be said for the Bank of England and European Central Bank who are seeing little or no evidence of inflation and are determined not to stifle early signs of growth.
Unlike the United States and Europe, the prospects for emerging markets look more hazy. 2013 was tough for emerging markets and this year is likely to be more of the same. With big question marks about Chinese growth and more Fed tapering to temper the outflow of cash out of America, caution is the word. In 2013, the IShares MSCI global Emerging Markets ETF was down 9.1%. Though emerging markets are not expensive on a p/e basis, several of them look prone to further downward pressure, especially Brazil and India.
Expectations of Chinese growth have been lowered as increasing problems with credit growth, shadow financing and local governance have been the themes of 2013. However, with growth expected of around 7.5% China is not down and out by any measure.
So the United States looks to be where the action is, but isn’t the market expensive?
The Dow Jones Industrial Average returned 27% last year and the S&P 500 was up nearly 30%, the most since 1997. The Nasdaq 100 Index climbed 35 percent and the Nasdaq Biotechnology rose 66 percent.
Valuations in the Standard & Poor’s 500 Index increased by the most since the financial crisis in 2013 as 460 stocks rose, more than any year since at least 1990. More than 90 percent of companies in the S&P 500 and about 85 percent of the Russell 3000 Index had year on year increases.
The bargain basement era of 2010-12 has certainly disappeared with the broadest rally on record sending price-earnings ratios up 19 percent. Since 1936, the S&P 500 has risen 69 percent of the time following quarters when valuations widened, the data show. The average return is 14 percent in years after more than 400 constituents climbed, according to data compiled by Strategas Research Partners.
But this is interesting……… U.S. stocks have never declined after gains were as widespread in the past, according to Strategas data going back to 1990. The S&P 500 rose 13 percent the year after 427 companies increased in 2009, Bloomberg data show. When 402 stocks ended 1997 higher, the S&P 500 added 27 percent the next 12 months. The measure advanced 20 percent after 434 stocks rallied in 1995.
Rotation from bonds to equities might well underpin equities
The great rotation from bonds to equities certainly seems to have started and there is little reason to own bonds. With future expectations of inflationary pressures and yields in 2013 at ultra low levels, the dividends alone from most multinational companies is reason enough to own them.
Equity funds attracted more than $160 billion in 2013, the most since 2000. Bond funds saw about $80 billion in withdrawals during the same period, ICI data show. About $260 billion had flown out stock funds the previous four years as more than $1 trillion was added to bonds.
A survey of analysts by by Bloomberg say that the S&P 500 will rise around 6 percent in 2014 to 1,955, this compares with an average forecast of 11 percent over the last five years. Analysts who cover individual companies are predicting 116 stocks in the index will fall this year, the largest number of bearish forecasts in nine years. The median prediction is at 1,950. For Earnings Per Share, the mean estimate is $117.20 with a median of $116.75.
The S&P 500’s price-earnings ratio rose three of the four quarters in 2013, the first time that’s happened since 2008. The key is will earnings growth really deliver in 2014. The market is currently priced at around 17 times earnings, next year projections are that the S&P 500 falls to an undemanding 15 times earnings. This assumes earnings grow in line with forecasts. All eyes will be on Q4 2013 and Q1 2014 earnings, and expect volatility. Most forecasters don’t expect the US markets to rise without any major corrections.
Earnings for the full S&P 500 will climb 9.7 percent in 2014, almost twice the rate of 2013, according to analyst estimates compiled by Bloomberg. Profit growth will come as sales increase 3.8 percent, up from the 2.2 percent last year, and the economy expands 2.6 percent, faster than last year’s 1.7 percent, forecasts show.
The Dow Jones Industrial Average has a P/E ratio of 17 and was 14.9 a year ago.
David Kostin, of Goldman Sachs predicts the S&P 500 hitting 1,900 with EPS of $116.00. He says, “The linchpin of our market forecast is growth – in the economy, sales, and earnings. We expect 3.6% global economic growth. The US will advance at a 3% pace while inflation remains contained at 1.4%. China, Japan, and even Europe will all grow, expanding GDP by 7.8%, 1.6%, and 1.5%, respectively….However, we expect no growth in margins and multiple in 2014. Recurring net margins have remained at a record-high plateau of roughly 8.7% since 2011. Firms have struggled to maintain profitability at current levels. We estimate flat margins for next several years. Client inquiries about the appropriate P/E multiple to assign US stocks routinely ignore that margins are extremely high on a historical basis and have been stagnant for several years. Valuation is the biggest wildcard in our market outlook.”
It is clear that 2014 is unlikely to be bad year for either U.S. or European stocks. Economies continues to improve, consumer confidence is up, unemployment is stable or falling, GDP growth is improving, and U.S. manufacturing continues to expand. Lets not forget central bank policy is still ultra accommodative despite Quantitative Easing being tapered. I’m not betting against Uncle Sam this year!
It’s going to be a fascinating year for equity investors!
Contrarian Investor UK
IMPORTANT
The posts I make are in no way meant as investment suggestions or recommendations to any visitors to the site. They are simply my views, personal reflections and analysis on the markets. Anyone who wishes to spread bet or buy stocks should rely on their own due diligence and common sense before placing any spread trade.
by contrarianuk
Where should I put my pension pot in 2014?
Jan 7, 2014 at 8:38 am in Market Commentary by contrarianuk
It’s that time of the year where I look at my pension holdings and decide where to place my bets. For the last couple of years the focus of my investments have been in global equity funds and they have done rather well. But with the big gains in 2013 (23%) , I moved everything into money market funds late in 2013, so missed out on the Santa Rally, though I avoided some of the emerging markets sell off. But with the Ishares MSCI world ETF up 22% for 2013 a reasonable performance. Though with the benefit of hindsight, a big bet on the S&P 500 and Nikkei 225 would have been the way to go.
After reading endless articles over the last 2 weeks, I am certainly more bullish on the U.S. market in particular, though am still not convinced for the case for a contrarian punt on emerging markets, gold or resources (with the exception of oil). The easy money has been made from the financial crash of 2008/2009, now it is going to be harder. Double digit gains are going to be tough to find without taking some risk. Corrections will come in 2014, so the big question is when to commit? Whereas throwing darts at a board would have made you money in 2012 and 2013, the equivalent of sticking your cash in index tracking ETF’s, stock selection and special situations are the key for 2014/15.
The case for the U.S. market
The American economy looks to be in pretty good shape and so it should be after all that Federal Reserve stimulus – trillions of dollars of it! U.S. GDP grew a revised annual rate of 4.1 percent in the third quarter, the fastest pace in almost two years, with the unemployment rate at 7 percent, a low for the Obama Presidency.
Forecasters are predicting continued above-trend growth in the U.S. to occur in 2014, with corporate earnings driven by increasingly bullish consumer and industrial demand. The IMF forecasts GDP growth of 2.5% for the US economy in 2014.
Despite further tapering by the Federal Reserve as the economy improves, the Fed have signaled that interest rates will remain near zero until probably late 2016 or 2017. Money has never been so cheap. Bernanke has made a point that markets should not expect the central bank to tighten rates any time soon. The same can be said for the Bank of England and European Central Bank who are seeing little or no evidence of inflation and are determined not to stifle early signs of growth.
Unlike the United States and Europe, the prospects for emerging markets look more hazy. 2013 was tough for emerging markets and this year is likely to be more of the same. With big question marks about Chinese growth and more Fed tapering to temper the outflow of cash out of America, caution is the word. In 2013, the IShares MSCI global Emerging Markets ETF was down 9.1%. Though emerging markets are not expensive on a p/e basis, several of them look prone to further downward pressure, especially Brazil and India.
Expectations of Chinese growth have been lowered as increasing problems with credit growth, shadow financing and local governance have been the themes of 2013. However, with growth expected of around 7.5% China is not down and out by any measure.
So the United States looks to be where the action is, but isn’t the market expensive?
The Dow Jones Industrial Average returned 27% last year and the S&P 500 was up nearly 30%, the most since 1997. The Nasdaq 100 Index climbed 35 percent and the Nasdaq Biotechnology rose 66 percent.
Valuations in the Standard & Poor’s 500 Index increased by the most since the financial crisis in 2013 as 460 stocks rose, more than any year since at least 1990. More than 90 percent of companies in the S&P 500 and about 85 percent of the Russell 3000 Index had year on year increases.
The bargain basement era of 2010-12 has certainly disappeared with the broadest rally on record sending price-earnings ratios up 19 percent. Since 1936, the S&P 500 has risen 69 percent of the time following quarters when valuations widened, the data show. The average return is 14 percent in years after more than 400 constituents climbed, according to data compiled by Strategas Research Partners.
But this is interesting……… U.S. stocks have never declined after gains were as widespread in the past, according to Strategas data going back to 1990. The S&P 500 rose 13 percent the year after 427 companies increased in 2009, Bloomberg data show. When 402 stocks ended 1997 higher, the S&P 500 added 27 percent the next 12 months. The measure advanced 20 percent after 434 stocks rallied in 1995.
Rotation from bonds to equities might well underpin equities
The great rotation from bonds to equities certainly seems to have started and there is little reason to own bonds. With future expectations of inflationary pressures and yields in 2013 at ultra low levels, the dividends alone from most multinational companies is reason enough to own them.
Equity funds attracted more than $160 billion in 2013, the most since 2000. Bond funds saw about $80 billion in withdrawals during the same period, ICI data show. About $260 billion had flown out stock funds the previous four years as more than $1 trillion was added to bonds.
A survey of analysts by by Bloomberg say that the S&P 500 will rise around 6 percent in 2014 to 1,955, this compares with an average forecast of 11 percent over the last five years. Analysts who cover individual companies are predicting 116 stocks in the index will fall this year, the largest number of bearish forecasts in nine years. The median prediction is at 1,950. For Earnings Per Share, the mean estimate is $117.20 with a median of $116.75.
The S&P 500’s price-earnings ratio rose three of the four quarters in 2013, the first time that’s happened since 2008. The key is will earnings growth really deliver in 2014. The market is currently priced at around 17 times earnings, next year projections are that the S&P 500 falls to an undemanding 15 times earnings. This assumes earnings grow in line with forecasts. All eyes will be on Q4 2013 and Q1 2014 earnings, and expect volatility. Most forecasters don’t expect the US markets to rise without any major corrections.
Earnings for the full S&P 500 will climb 9.7 percent in 2014, almost twice the rate of 2013, according to analyst estimates compiled by Bloomberg. Profit growth will come as sales increase 3.8 percent, up from the 2.2 percent last year, and the economy expands 2.6 percent, faster than last year’s 1.7 percent, forecasts show.
The Dow Jones Industrial Average has a P/E ratio of 17 and was 14.9 a year ago.
David Kostin, of Goldman Sachs predicts the S&P 500 hitting 1,900 with EPS of $116.00. He says, “The linchpin of our market forecast is growth – in the economy, sales, and earnings. We expect 3.6% global economic growth. The US will advance at a 3% pace while inflation remains contained at 1.4%. China, Japan, and even Europe will all grow, expanding GDP by 7.8%, 1.6%, and 1.5%, respectively….However, we expect no growth in margins and multiple in 2014. Recurring net margins have remained at a record-high plateau of roughly 8.7% since 2011. Firms have struggled to maintain profitability at current levels. We estimate flat margins for next several years. Client inquiries about the appropriate P/E multiple to assign US stocks routinely ignore that margins are extremely high on a historical basis and have been stagnant for several years. Valuation is the biggest wildcard in our market outlook.”
It is clear that 2014 is unlikely to be bad year for either U.S. or European stocks. Economies continues to improve, consumer confidence is up, unemployment is stable or falling, GDP growth is improving, and U.S. manufacturing continues to expand. Lets not forget central bank policy is still ultra accommodative despite Quantitative Easing being tapered. I’m not betting against Uncle Sam this year!
It’s going to be a fascinating year for equity investors!
Contrarian Investor UK
IMPORTANT
The posts I make are in no way meant as investment suggestions or recommendations to any visitors to the site. They are simply my views, personal reflections and analysis on the markets. Anyone who wishes to spread bet or buy stocks should rely on their own due diligence and common sense before placing any spread trade.