A very warm welcome to 2014.
In the light of my yule-tide Right Side on asset allocation for 2014 – and what seems like my rather sunny outlook for this year – I think I should put some meat on the bones. Today I want to explain exactly why I’m optimistic about investing in 2014.
I’ll get to my reasons later, but first, let me assure you that I haven’t lost my cynicism about what’s really driving the market. Politicians and central bankers are as dangerous as ever.
I mean, only yesterday the prime minister gave us another example on The Andrew Marr Show. Mr Cameron invented the “triple lock on pensions”.
He told us that pensioners will now look forward to income increases that will outpace inflation… or if wage inflation is greater than general inflation, then the state pension will keep pace with that… and to top it all, even if inflation and wage inflation remain subdued, pensioners can look forward to a 2.5% increase anyway.
No money manager living in the real world could offer these sorts of promises. These are the sort of promises that only a politician can make.
Whether our economy is subjected to ‘wage-pull’ inflation, whether it’s a currency collapse and Zimbabwean inflation, or heck, even if we hit a horrible, Japanese-style deflation, pensioners (or should I say, the electorate?) will be in clover.
Andrew Marr asked the obvious: “Prime Minister, is it because 68% of pensioners vote – a much higher proportion than any other group – that you’re being so generous?”
“Oh, no no. It’s because these hard-working people deserve it!”
The thing is, Cameron is probably right to feel gung-ho just now – and to be making such expensive promises. And I think I’m right in following this sentiment in my investing.
I suspect 2014 will be another good year for UK investors. Here are four reasons why the government will help keep our investing boat steady this year.
Back to growth
First of all, most leading economic indicators point to serious growth for 2014. Some economists are even pencilling in 5% growth for the UK this year. Now, after years of decline and stagnation, if the economy grows at anything like that sort of pace, then the feel-good factor is likely to overflow into the markets.
The all important PMI lead indicators have recently reached levels not seen since 1998. Employment lead indicators are also hitting highs. The previously faltering construction industry is now back on track.
Of course, much of this comes down to the good, old housing market. There’s a boom – didn’t you know? Some pundits are pencilling in house-price growth upwards of 10% for this year.
The correlation between house-price growth and economic growth is strong. We may not agree with it, but we shouldn’t ignore it.
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Politics is driving the economy now
After a few years of so-called ‘austerity’, the politicians like to think that we’ve turned the corner. The economic cycle is now in step with the electoral cycle.
After all, who do you think benefits from the housing boom? (Hint: help to buy is set to really kick in this year.)
We’re talking about a consumer boom generated from borrowing against a rising housing market. Housing debt drives growth; there’s little doubt about that. I think that in 2014, a dangerous housing bubble will be blithely ignored.
And just in case the housing boom isn’t enough, the government is set to go on its own spending spree too.
You see, back in 2011, the government took a hatchet to investment. It got smashed by some 26%. Last year, it was down by 7% too.
But hey, now that we’re within sight of an election, the government is feeling more generous. According to Osborne’s Autumn Statement, the government is looking to spend more than 7% more on investment this year.
Inflation taking a back seat – for the moment
Now, normally, the problem with an economy firing on all four cylinders is that inflation tends to pick up. But again, the government seems to have all its ducks in a row.
Right now, there’s not much inflation. Commodity prices have been subdued for most of last year, which is a let off. That keeps down the prices of imported things like food and fuel. And that means it’s unlikely inflation will show up in 2014.
Not only that, but the feel-good factor has pushed the pound up over recent months. That means our all-important import costs are falling. Again, a strong pound helps subdue inflation.
That means the politicians can refrain from raising the old interest rate tax. Monetary policy can stay loose. And Mark Carney, the head of the Bank of England, is likely to play ball. Despite what he may say, I strongly suspect that rates will remain well below 2% over the coming years.
And that means that everyone and his dog will continue to chase yields in the investment markets.
Back to housing…
So, the housing market is heating up. And with the help to buy scheme, the government is stoking the fire. But let’s not forget that encouraging debt is what caused the 2008 crisis in the first place.
In fact today, the problem is much worse. Central banks and governments have worked much harder in the last few years to manipulate the markets and encourage debt. We’ve all seen how things turn out when the bubble pops. And the planners are scared of precisely this scenario right now. Borrowers are being misled. They’re told that rates won’t go up – at least not to excruciating levels. And that will be true for 2014, probably for 2015 too.
But there’s no doubt that short-term solutions are creating long-term dangers. And if you think I’m being too optimistic in thinking things will stay calm for another year, well, that’s fair enough.
But I still think that, overall, 2014 will be a good year in the markets. It’ll probably be a good year for borrowers and asset speculators. And perhaps more importantly, it’ll be a good year for the politicians.
A housing boom will create a feel-good factor which pushes our economy ahead.
Don’t be surprised to see strong growth. Don’t be surprised to see the pound continue its strong run. And certainly don’t be surprised to see the stock market continue its winning streak.
Hurrah for that. Let’s run with the theme for another year!