Gold Magazine January - February 2014, Issue 34

EVGENIOS ANTONIOU Head of Asset Management, CISCO 2013 For 2013, the winning asset class was equities, mainly driven by the quantitative easing followed by the major Central Banks. The MSCI All Country World Index rallied by 20.25%, with Japanese (Nikkei Index), US (S&P 500 Index) and European (MSCI Europe Index) equities rallying by 56.72%, 29.60% and 16.43% respectively. On the contrary, Emerging Market equities (MSCI Emerging Markets Index) plunged by 4.98% in 2013. Global bonds underperformed global equities, with the Barclays Global Aggregate Total Return Index posting a 2.6% loss for the year. Commodities also underperformed equities with gold surprisingly plunging and entering into the bear market zone and with the Thomson Reuters/ Jefferies commodity index posting a -5% loss for 2013. EQUITIES 2014 is not expected to be as sensitive to macro developments as previous years – since a lot of positive macro expectations have already been discounted by the equity markets – and so the global equity upside potential for 2014 appears less compared to 2013. As long as the momentum for ‘risk on’ is maintained, equities could continue their rally. However, 2014 might appear a more volatile year, especially for US equities as market volatility may rise stemming from any positive US growth surprises which may leave the Yellen-led Federal Reserve behind the curve and hence increase the magnitude of tapering. It is worth mentioning that QE tapering in the US should impact a lot less on European stocks when compared with the potential impact on emerging and US equity markets. Consequently, the valuation gap between US and European equities might narrow within 2014. On a eurozone level, although the political risks have decreased and the leading macro indicators and sentiment improved, the eurozone crisis has not yet been resolved. Japanese equities might continue the rally, fuelled by so-called ‘Abenomics’. A further yen depreciation could result in a more competitive economy which will benefit Japanese exporting companies further. However, a Japanese equity rally this year will be challenged by the Shinzo Abe government’s introduction of consumption tax hike in 2014. Emerging Market equities appear attractive on relative valuation grounds when compared with the developed equity markets. However, a further correction should not be precluded as long as Fed tapering and “China Financial Crisis” market worries persist. In 2013, due to the low yield environment investors turned to bond-like equity investments and hence high-dividendpaying stocks rallied. As a result, dividend growth stocks appear more attractive than dividend paying stocks on relative valuation grounds. The valuation gap between income and growth stocks might decrease in 2014. BONDS The US is generally ahead of the curve compared to the rest of the world, especially Europe, in terms of its Quantitative Easing (QE) programme, the recapitalisation of banks, etc. Hence, the US tapering will

Gold Magazine January - February 2014, Issue 34 | Page 25