2014: Facing Different Risks and Rewards

Only four months ago markets were worried; concerned about the mid-year growth pause, the US fiscal cliff, German elections, policy change in China, replacement of the Federal Reserve chair and, of course, tapering of US bond purchases. As each event unfolded favourably, equity markets embraced reduced uncertainty. Our portfolio remained fully invested through this period as we focussed on stock specific earnings outcomes and prospects. It is fair to say that we have been more optimistic than most on global and New Zealand growth.

Global equity markets are up some 24%  year to date and the New Zealand equity market has almost kept up rising 19%, Harbour’s portfolio is up 26% in gross terms in the first 11 months of 2013.

Source: Harbour, Bloomberg, Past performance may not provide an appropriate guide to future performance.

In our opinion the prospects for the world economy remain better in 2014 than in 2013.

However, equity markets are no longer cheap, and global bond yields may not have fully adjusted to the prospect of strengthening growth. Some stretch in valuations means that any failure to meet earnings targets, or a setback in growth expectations, risks a pull back in equity prices. Having said that, as noted by London based Absolute Strategy Research, "history tells us that global equities tend to beat global bonds when unemployment is falling".