SBM’S NEW CONTRIBUTOR IS INTRODUCED WITH A 2014 MACRO OUTLOOK TOUR DE FORCE

Here at SBM we pride ourselves on the quality of our research, ideas and editorial. Not for us pumping out tip after tip day after day and inevitably homegenising towards the 50% (or less) success ratio. We only write when we have something interesting to say and only work with the best in the industry.

With this in mind, we have pleasure in introducing a new contributor to both the blog and the magazine. Like the founder of SBM Richard Jennings, Chris Bailey of Financial Orbit is an ex institutional fund manager and so brings a gravitas to the publication that is all too rare out there in the financial website fraternity.

We open with Chris’s Global Macrp themes for 2014 and that is a veritable tour de force of ideas. Enjoy…

Macro trend 1: contrarians will rock

Yes, it happens once every few years.  Don’t follow the crowd.  Keep on reading for which overowned areas to ignore/sell and which of the underowned areas to buy…

Macro trend 2:  High sentiment doesn’t stay high…and the return of volatility

5 year plus sentiment highs in late December are not sustainable.  To be fair, 2013 was a year of variable investor sentiment – as most years tend to be – the difference was that volatility, as measured by the VIX, remained at very low levels during the year as shown in the 5 year chart below.  And what pushes volatility up?  Well, that’s when the easy extrapolations are forced to stop…

Macro trend 3: equities – time for active stockpicking again 

A sixth year of 5%+ gains in the DJIA?  That’s the easy extrapolation most strategists have factored into their 2014 projections.  Flicking through the history books though, that has never happened before…even five successive 5%+ gains is historically very rare.  Sometimes it is just time. 

Here’s what this means though.  Go against the flows into index funds and embrace stockpicking again. 

Macro trend 4: global QE is still alive…it is just you need to be paying attention to Japan and Europe, not obsessing about what Janet Yellen is going to be up to

The start of the taper is not the end of QE.  Far from it.  QE in a year’s time will be bigger than today…but its new source at the margin will be different.  More action from the Bank of Japan, new action from the ECB whilst both the Federal Reserve and the Bank of England attempt to reduce support (but will ultimately do a lot less than people think).  All this change though induces uncertainty and volatility.  That’s why the VIX will rise and why investors need to move away from the index fund. 

Macro trend 5: don’t expect real consumer incomes in ‘the West’ to roar away…and hence don’t expect GDP to be sustainably significantly above trend

Despite the best efforts of global QE, the flat-lining at best trend is set for another reprise in 2014, so we are set for another slightly shabby backdrop for biggest component of GDP. 

Macro trend 6: emerging markets have value, but no-one cares, which is why you should 

Yes, that’s a wide P/E valuation gap but there’s always something to worry about with the emerging markets, yes?  Of course, but you are telling me that stock pickers cannot find value?  There are things to be doing in all equity markets but the risk:reward opportunities are best in the emerging world.

We all forget just how big the emerging markets are.  Yes, China has issues, but they also retain far more policy flexibility than most countries I could name.

Macro trend 7: companies spend more on capex…but investors will retain the right to change their mind whether it is good or not

Yes, fund managers today want more capex…but don’t expect companies who spend to be rewarded in 2014.  More capex equates to greater productivity, a newer range of products and enhanced competitiveness, yes?  Of course.  However as one of those bouts of volatility hit, investors will gravitate – at least temporarily – to those companies rediscovering buybacks and dividends.  That sounds like sector rotation to me…another reason why buy-and-hold on index funds is not a good idea.

Macro trend 8: China continues to accumulate gold…and this (and low sentiment) pushes the gold price up

Gold, eh?  You can barely find anyone who is bullish about the shiny precious metal at the moment.  But look who is accumulating it.  That’s all you need to know.

Macro trend 9: property is not going be so strong in 2014

There was a time when banks would lend a maximum of around x3.5 a borrower’s salary.  Global property, especially in major conurbations, was very hot in 2013.  It will be a lot more mixed in 2014.  

Macro trend 10: Berlin are going to have to accept a lower Euro…which means generally a stronger US Dollar

The Euro is, as I write, kicking around two year highs against the US Dollar.  High productivity German exporters are not going to be that bothered by this.  However the rest of Europe may beg to differ and this will seep into official policy-making (more QE) as well as into market sentiment (a lower Euro).

Macro trend 11: your best source of returns in bonds during 2014 will be from yields

The first total return down year in more than a decade for most bond investors.  Bond yields are going to be on a magical mystery tour during the year, helped by the rising volatility levels, but hurt by the growing realisation that bond yields in the developed world are just too low, even in a dull growth environment and with global QE support.   There is more volatility in equities…but the scope for better returns.

Macro trend 12: the continued growth of the online world

The growth of the Chinese online retail market will continue apace…

…often sourced from smartphones or tablets.  Important knowledge for stockpicking.

Macro trend 13: agriculture grades are due a run

Growing global demand, growing agricultural trade, rising surpluses…the first two are inexorable, the latter is dependent on many other factors.  These quotes from a late December article will look overly optimistic/benign in a year’s time… 

Wheat prices slumped 22 percent in Chicago this year, set for the biggest annual drop since 2008, as the U.S. Department of Agriculture projected a world harvest at an all-time high of 711.4 million metric tons. Reserve inventories before the 2014 harvest will rise 4 percent to 182.8 million tons, the USDA said. “There is too much global supply,” Mark Schultz, the chief analyst for Northstar Commodity Investment Co. in Minneapolis, said in a telephone interview. “The story for 2014 will be one of lower prices to improve the incentive for importing nations to stockpile wheat.” 

Wheat futures for delivery in March dropped 0.5 percent to close at $6.0625 a bushel at noon on the Chicago Board of Trade, after touching $6.0575, the lowest for a most-active contract since May 16, 2012…Soybeans rose on increased overseas demand for U.S. supplies, while corn gained on speculation that rains may not improve depleted soil moisture in parts of Brazil and Argentina, the biggest exporters after the U.S., Schultz said. Soybean futures for March delivery rose 0.2 percent to $13.2275 a bushel in Chicago. The price fell 6.2 percent this year on USDA forecasts for record crops in South America, where harvesting begins next month. Corn futures for delivery in March added 0.1 percent to $4.345 a bushel. The grain fell 38 percent this year as the USDA estimated domestic farmers boosted output this year by 30 percent to a record. 

Macro trend 14: stay flexible…

…2014 is going to be that sort of year. 

To visit Chris’ own site, click the image below.