Since the start of the year stock indices in emerging markets have fallen significantly, with no end in sight. The
The common thread is investor nervousness. With the withdrawal of quantitative easing (QE) in the US, these countries will find it hard to borrow money to finance fiscal and current account deficits.
At the end of last year every stock market analyst I met was bullish but now, with the tapering of QE, investors have become more cautious, despite the economic recovery we are witnessing in the US, the
Global output and economic growth are accelerating, according to recent
US GDP growth could exceed 3 percent this year. The US treasury market looks reassuringly stable, despite tapering of QE, and growth is underpinned by low inflation and interest rates.
Other areas such as the euro zone and
As QE is withdrawn, the dollar should strengthen, in response to high US interest rates, making local current account deficits harder to finance.
In addition to the problems facing all emerging markets,
The major risks to the developed markets' recovery are that the juggernaut of growth in
In addition, bad loans in the banking sector and a shadow banking sector could jeopardise Chinese financial stability.
In the euro zone, the risk of deflation was highlighted last month by
We are in an upward global economic cycle which does not look like being knocked off course by these risks.
Therefore, we recommend a pro-investment strategy, even if the near-term stock market outlook is uncertain.
We favour developed over emerging stock markets for 2014. Although returns may be modest, they should still outperform the bond markets.
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