Markets in 2014

The past week was an indication of what I expect for 2014. The South African share market came down by 4% and the Rand weakened by 4% while the Dow Jones in the US reached an all-time high. The SA market and Rand then bounced back a bit but the soft underbelly of our economy has exposed itself to what can be expected in 2014.

2013 has been another tremendous year for equities! SA is up 20% and the USA also. This follows a 2012 of 26% in SA! My prediction is for a volatile but flat 2014 in SA but good returns in the USA and Europe. There are 2 things that will dominate the markets in 2014 and they are:

·       USA tapering and
·       Growth in China

Fed Tapering is the process by which the central bank in the USA decreases the amount of money they pump into the economy. Why is this bad? Because it is like putting only a little petrol in your car instead of filling her up and still having to drive the same distance. You will naturally take your foot off the accelerator and if you are not over the steep mountain pass, you might just run out of gas before the downhill.

 
Tapering will only happen when the economy in the USA is strong enough to support itself and although short term traders in the market will sell some of their shares, the longer term outlook for global shares will be positive. Unfortunately for South Africa, this will make risk free investments in the USA more attractive (long bond yields in USA will go up), and the result will be the selling of SA shares and bonds to take back to the USA.
 
The double whammy for South African investors will be the further weakening of the Rand or at best little potential for Rand strength. Given the inability of our supreme leader to follow the good advice of his ministers like Pravin and Trevor, who understand that our trading partners and the people with money and power follow a capitalist approach, he still dwells in an African Tribal mindset where a R200 mil homestead and friends, rather than competent individuals in strategic government positions dominates his thinking.

 As for other asset classes like cash and bonds you will once again cry your eyes out like you did this year! Cash gave you 5% and Bonds 1%. Listed Property will follow bonds down initially but medium term I would start looking at allocating some money here.

 Once again we will wait with bated breath for China to come and save our commodities driven economy.  If Chine can manage a better GDP growth, say above 8%, our commodities will benefit a lot. 2013 saw another year where the shares in our market performed out of sync:

Industrials          30%

Financials           19%
Resources          2%        

So switching from overvalued financials and Industrials into resources will be a play lots of investors contemplate. All in all you have to stick to the sound investing principals of holding cash for 2-3 year expenses but committing longer term money to shares, some local but the majority overseas.