8/13/2019 Outlook for a Outlook for a Prosperous 2014Prosperous
2014 _ BC Business
2/5
Image by: Attila Toro / PhotoXpress
Economic indicators suggest upward momentum for stocks and
bonds continuing into 2014
The past year has been marked by record high stock-market
performances and signs of cautious growth
in some of the worlds economies. While this has been
encouraging, investors in B.C. and elsewhere arewondering whether
some of the momentum of 2013 will carry over into next year. Here
are our thoughts:
Global Growth
Leith Wheeler expects a gradual improvement in global economic
growth and we forecast increases in
the two-to-three per cent range. Part of the improvement will
come from Europe, which, despite pockets
of weakness, is starting to grow again after its deep recession.
Emerging markets are also beginning to
improve, while concerns about Chinas slow growth are receding.
The most significant change, however,
is in the U.S., where the housing sector continues to get
stronger. Housing starts have been much lower
than long-term demand and the number of building permits is
beginning to increase. Low mortgage rates
and improved housing prices are helping to release years of
pent-up demand. This sectors contributionto the economy will also
help restore consumer confidence and spur spending.
The biggest determinant of global growth is the potential impact
from corporate investment in plant and
equipment. Business confidence has been somewhat contained due
to tepid sales growth and uncertainty
over the U.S. budget and debt ceiling. However, there are some
encouraging signs that things are getting
better, particularly in the oil and gas sector and some parts of
the American manufacturing sector. Even
with an improvement from depressed levels, capital spending will
grow at a slower pace than in previous
recoveries.
Stock MarketsMost major stock market indices in North America
touched all-time highs in 2013. This has raised
concern that stock valuations are being inflated by
money-printing by the U.S. Federal Reserve.
However, its our view that the primary driver of stock market
valuations has been corporate profit
growth, not the Feds actions. Most of the reserves that have
been created to purchase bonds continue
to sit on bank balance sheets in the form of excess reserves. In
effect, banks are choosing to continue
to hold the increase in money supply rather than using the funds
to support new loans. Economic growth
and inflation will remain curtailed as long as lending activity
remains subdued.
We think stock-market valuations can be sustained in 2014
through reasonable growth of corporate
profits. Revenue expectations are improving as market
participants get more confident with globalgrowth. Over the last
several years, companies have got their balance sheets in order and
are now
refinancing their debt at cheaper rates, further helping their
profitability. Finally, capital is being returned
to shareholders though increased dividends and improved stock
buybacks. These signs point to stock
market returns in the range of six to eight per cent annually
over the next several years.
Bonds
We expect the Federal Reserve to gradually taper the pace of
bond purchases, starting in the first quarter
of 2014. These actions will lead to higher interest rates.
However, we expect any increase in bond yields
to be moderated until the Federal Reserve begins to increase the
Federal Reserve fund rate. Given the
