My six big predictions for 2014

Earlier this week my colleague, Dominic Frisby, said he would give some predictions for 2014 in January.

Being a cheeky soul, I’ve decided to beat him to the punch and put out my predictions before him. Sorry Dominic…

My overall view is that 2014 will probably be a reasonable year for investors and there should be some decent money-making opportunities. I’ve highlighted some of my favourites below.

However, I’m not an all-out bull. Sure, there are always lots of thing to worry about. But with the valuation of the US – the market that most others take their cue from – so vulnerable to nasty surprises, I’m not going to pile in and invest every last penny in stocks and shares.

That said, here are my six big calls for 2014…

1. A good year for Japan

This is hardly a controversial stance in the MoneyWeek office, but I think Japan’s Nikkei index will rise by at least 10% next year, taking it to well over 17,000. I wouldn’t be surprised if the rise was actually much larger.

Valuations are cheap and policymakers are clearly determined to do whatever it takes to get the economy moving. That inevitably means massive money-printing, which can only be good for the stock market. And as John Stepek pointed out yesterday, there’s still ‘a surprising amount of scepticism’ among investors about the Japanese bull story.

If anything, the Japanese themselves are even more sceptical than foreign investors. Domestic investors have stuck with government bonds since ‘Abenomics’ began, but if the economy continues to grow, some of those investors will have to capitulate and switch into equities.

And that’s when share prices could really start to motor.

The only downside for UK investors is that the yen may well fall further at the same time, so you may want to hedge your exposure here. There are plenty of funds that hedge yen exposure, and I suspect more will become available as the Japan story grows legs.

2. Bank of England base rate will rise in 2014

This one’s a bit more controversial. The current consensus in the market is that the base rate will finally rise from 0.5% in mid-2015, but I think it will happen earlier – probably in the last three months of 2014.

This week’s encouraging unemployment figures suggest that the British economy is finally picking up real steam. If that’s indeed the case, inflation will almost certainly rise sooner or later too.

Granted, inflation has just fallen to a four-year low, but the UK economy always seems especially susceptible to inflation and I’m pretty sure that it will revert to type before the end of next year.

I’m not suggesting that prices will soar. But they’ll move up just enough to make Mark Carney nervous. And that means we’ll have a 0.75% base rate by Christmas.

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3. Inflation will fall in the eurozone

Even although we’ll probably see a modest pick-up in UK inflation next year, it’ll be a different story in the eurozone. I expect the eurozone inflation rate to slow further, prompting increasing concern about the prospect of deflation.

That could force European Central Bank (ECB) boss, Mario Draghi, to launch a more aggressive form of monetary stimulus. So far he’s held back from full-blown quantitative easing (QE), but now that the German election is out of the way, QE – or something similar – looks like an increasingly feasible option.

In other words, the ECB will print plenty of euros and buy government bonds with long and short durations. That means you can probably still make money in eurozone shares this year.

4. Tesco will have another bad year

Tesco’s share price is down 16% since the summer. But don’t expect a recovery in 2014. This is a company with serious problems. It’s losing business at the bottom end of the market to Aldi and Lidl, while it struggles to compete with Waitrose at the top end of the market.

What’s more, large out-of-town hypermarkets are no longer the asset that they once were. In fact, we may even see them as white elephants before too long. So if you want to invest in retail, go for Next (LSE: NXT). It has a management team that keeps on getting it right, unlike Tesco.

5. The BJP will win the Indian election

The opposition BJP will win the upcoming Indian election. That should mean renewed economic reform and a resurgent stock market. India is hardly cheap at the moment, given its woes over the past year, but if you’re holding on to it, stay invested.

6. Ed Miliband will sack Ed Balls

I can’t resist one purely political prediction. I reckon Ed Miliband will move Ed Balls from the Shadow Chancellor job next year. We know that Miliband is a pretty ruthless individual – he knifed his own brother after all – and Balls is now clearly a liability.

Shadow Home Secretary, Yvette Cooper, would be an excellent replacement in many ways, but she probably won’t want to take her husband’s old job. So that means either Alistair Darling or Chuka Ummuna will get the job.

The big worries

I said at the beginning of this article that I’m not an all-out bull. Obviously lots of different things can go wrong, but right now there are three issues that make me especially nervous.

Firstly, I worry about how the US would react to a more serious taper than we’ve seen so far. Given Janet Yellen’s apparently relaxed attitude towards inflation, I can’t see the Fed getting a lot more aggressive, but never say never.

Secondly, I’m concerned by the fact that European banks still haven’t really been ‘cleaned up’ to the extent that has happened in the US. If the tangled politics of Europe get in the way of dealing with this problem, it could potentially lead to another flare up of the eurozone crisis.

And finally, when there’s so much debt across the world, and vast amounts of ‘printed’ money sloshing around, you just can’t be an unreserved optimist. When markets remain this sensitive to the actions of central banks, you can’t take anything for granted.

Still, I’ll try to hold my nerve – and hopefully make some decent profits from Japan.

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6 Responses

  1. 20/12/2013, kp1946 wrote

    And then there are the political worries, not least of which is hostility between Japan and China, which could undermine optimism over Japanese shares…….

  2. 20/12/2013, richard tavener wrote

    Are you aware of the impending deadline of Russia’s 20 year uranium supply agreement with the U.S, code-named M2M, on 30th December? This was originally signed by Yeltsin and I’m reliably told that there’s no way that Putin will renew it, thus leading to another “cold war”. Apparently, nuclear power accounts for c20% of U.S energy consumption and and the loss of Russian uranium imports will be critical, forcing the government to desperately seek alternative sources at greatly increased prices. With the electricity grid network already in poor condition, vast areas could soon be facing blackouts affecting both companies and individuals and this could naturally be very disruptive. any comments?

  3. 21/12/2013, Inquisitor wrote

    I suspect it’s because all central banks have now opened the money spigots (and are likely to be joined by the ECB), and there is no end in sight for this in Britain until 2015ish. In fact, despite the high levels of debt and possibility of an upward spike in interest rates, the fact that the rest of the world is doing it may mean Europe and the UK get off lightly, as I think the bubbles forming in the US (particularly in govt bonds and other interest-sensitive assets) and China (property) make the ones here seem rather tepid.

  4. 23/12/2013, Aquinas wrote

    Where did you get this information from? If this is true, hopefully this will mean that America will take power generation from thorium seriously.

  5. 29/12/2013, Boris MacDonut wrote

    Today, yet again, we see how difficult predicting is and how bad the economics “experts” are at it in David Smith’s S Times annual forecasting league for 2013. The 40 leading economic forecasters try each year to predict UK GDP, Inflation, Unemployment, base rate and so on. Only one got it all correct.
    Every single one overestimated unemployment.
    Only two got the GDP figure, most were way under.
    Only four got inflation correct ,while the rest were wildly out….mainly too high.
    It seems extraordinary that politicians and investment analysts put their faith in these finger in the wind merchants. Some suggested GDP of 0.2% when it will probably end up at nearer 2%, almost 90% out. One expected unemployment to double in 2013. A couple even expected a base rate rise!!
    Most are no better than a monkey with a choice of three cups and a hidden sugar lump.

  6. 02/01/2014, Oliver, Bath wrote

    I just received a “The worst is yet to come…” email. That was considerably downbeat!!

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