Gold Magazine January - February 2014, Issue 34 | Page 23

by improving economic fundamentals but
also by the possible implementation of the
Basel III EU directive which could have a
spread widening effect. Bond investors will
need to remain lively and active in 2014
to take advantage of opportunities. It is
no longer the traditional market in which
your long-term strategic views can provide
stable returns. Investors will need to trade
around their principal views and take advantage when uncertainty causes mispriced
opportunities. Placements in Floating Rate
Notes and short-dated fixed rate bonds
should provide relatively high risk-reward
ratio whenever they selloff.
Emerging Market bond markets are
expected to experience similar dynamics
to equities as the pace and effects of US
tapering will play a central role. Additionally, higher US interest rates will result in
higher loan servicing costs and this could
result in EM currency depreciation. International investors must also factor in
currency risk before making placements
in local currency denominated bonds. In
addition, there is concern about the sustainability of Chinese growth rates and a
subset of the Asian banking sector (India,
Indonesia and Thailand), where banks
are already suffering from deteriorating
loan books and tight liquidity conditions.
Again, caution is advised and careful selection is the order of the day when looking
at corporate Asia.

COMMODITIES

Political instability in the Middle East and
other oil-producing countries still casts
fears of possible disruptions to the supply
of oil. We expect an increased demand for
energy as developed economies continue
to grow. Consequently, we believe that
energy prices will carry on their upward
trends in 2014. Investors should be aware
of developments in Libya and Iran which
could be the wild card in terms of oil supply towards the end of 2014.
Gold and other highly correlated precious metals are expected to continue
their downward trend well into 2014, as
uncertainty subsides in the US and other
Western economies and rising risk appetite
switches positions out of ‘safe haven’ assets. We believe that any long positions at
this point are very risky as the market has
not found a bottom just yet.

FOREX MARKET

Last year was all about Central Banks in the
FX market. All the focus, by and large, was
drawn to the Central Banks as they used their
policy tools to help their economies get on
the appropriate growth and stability path. At
the moment we are witnessing a considerable

INVESTORS SHOULD
EXHIBIT EXTREME
CAUTION IN HOLDING
POSITIONS IN
LOCAL FINANCIAL
INSTRUMENTS
monetary policy divergence between the US
and the UK on the one hand and the eurozone and Japan on the other. This divergence
is expected to intensify in 2014 and become
more and more evident. The Federal Reserve,
having acted decisively, has provided a tremendous amount of stimulus in order to help
the US economy recover and at the moment
it seems that is has worked well and the US
economy is indeed performing much better.
The tapering of bond buying has begun and
will continue in 2014. The Bank of England
seems satisfied with the way things are working out for the British economy and does not
consider any more easing, while the Bank of
Japan (BoJ) end the European Central Bank
(ECB) are very worried about deflation, poor
growth and labour market conditions. As a
result, the BoJ has already begun a massive
expansion plan to provide sufficient liquidly
in the markets to help the economy grow out
of stagnation and may well provide more in
the coming year if necessary, while the ECB is
considering both quantitative easing (QE) and
negative interest rates as possible tools.
A ́