Worldwide: Investment Outlook - August 2013

Last Updated: 12 August 2013
Article by Alastair Barbour and Ned Fox


More positive momentum

Fears of Federal Reserve tightening and slower economic growth receded in July after two months of nervousness, with many equity markets producing strong rallies to claw back their earlier losses, despite bond yields resetting at higher levels.


While speculation about the Federal Reserve's timetable for tapering its quantitative easing (QE) programme continues to provide the most important focus for investors, away from the noise US equities have resumed their rally, with the S&P 500 index breaking through to new highs in mid-July, reversing all the losses of the previous few weeks. Although the picture painted by recent macroeconomic data has been mixed, second quarter GDP came in better than expected, suggesting an economy growing at an annualised rate of 1.7%. The figure will no doubt give the Fed food for thought as it debates the timing of its next move. Chairman Ben Bernanke has reiterated the official line that there is no pre-determined course for slowing the pace of QE. It will be dependent on the economic data. Should labour market conditions improve on a consistent trajectory, we expect the Fed to begin tapering its asset purchases in the fourth quarter. Treasury yields have continued to back up by almost 30% since Mr Bernanke's speech on 22 May and now yield significantly more than either UK gilts or German bunds. If the Fed eases its foot off the pedal, Treasury yields could well drift gradually higher. Mr Bernanke has been at pains however to emphasise that scaling back QE should not be seen as a tightening of monetary policy, insisting that a rate hike is highly unlikely until at least mid 2015. With inflation remaining below the Fed's target level, and economic growth still nowhere near pre-crisis levels, monetary policy will remain accommodative.

Although some uncertainty remains, for now at least much of the dust appears to have settled and US equities have gone from strength to strength, even in the face of rising bond yields, with the S&P 500 delivering around a 20% total return year to date. The sharp sell-off in bonds in May and June has finally prompted some significant flows out of bond funds and into equities. Our view is that investors still need to focus carefully on company fundamentals in assessing the scope for further gains after such a strong first half showing. With more than half the S&P 500 companies having reported second quarter earnings, most sectors have beaten both sales and earnings estimates, although the overall year-on-year gain is only around 3.5%. Financial stocks, notably banks, have produced the biggest positive surprises, helped by higher interest rate margins and improved investment banking returns. In absolute terms, valuations of US equities are starting to look stretched, but positive momentum shows no sign of easing up for now.


The second quarter GDP data confirmed that the UK economy continues to turn a corner. The 0.6% quarterly rise in economic activity, while far from astounding, was another step in the right direction and is consistent with a somewhat brighter outlook for the UK. The breakdown showed a pick up across the board in manufacturing, construction and services, pointing to a more balanced recovery. Recent employment figures continue to show a steady improvement in job market conditions. Job vacancies are now at their highest level for almost five years with the ratio of jobseekers to jobs falling to 4:1. With Mark Carney's feet now under the table at the Bank of England, the minutes from his first meeting in charge of the monetary policy committee showed a unanimous vote against any further QE. This may be an early indication of Mr Carney's powers of persuasion, or perhaps an intriguing pointer to the fact that some new policy initiative lies around the corner. A mixed strategy that employs a wider range of policy tools is a possibility going forward. Mr Carney's past experience of using forward guidance already seems to have gained him some credibility in the gilt markets, where yields, while higher than earlier in the year, remain below those of equivalent US treasuries.

With a new governor at the helm, a slowly improving economy and the door open for something beyond gilt purchases, the UK equity market is becoming more popular with international investors, comfortably outperforming the global market over the year to date. The cyclically adjusted price/earnings ratio for the market as a whole is well below its long-run average since the late 1970s. Economically sensitive sectors such as personal goods, travel, leisure and financials all have projected double-digit earnings growth for the next three years. With the eurozone apparently on the mend, the defensive qualities of the UK market may mean it underperforms in the near term. However with an economy gaining traction and monetary policy accommodating, we remain positive on the medium term outlook for UK markets.


A year on from Mario Draghi's now famous 'whatever it takes' speech, the eurozone is finally showing signs of wakening from its long recessionary nightmare. At this month's meeting of the European Central Bank's (ECB) policy committee, Mr Draghi indicated that the ECB too would be moving towards a fashionable 'forward guidance' approach, stating that interest rates in the region will remain at lower levels for an extended period of time, a statement that pleased European equity markets. A steady flow of encouraging economic data over the quarter continues to improve investor perceptions towards the region. July's Purchasing Managers Index (PMI) reading climbed into expansion territory for the first time since late 2011, suggesting that there has been a modest return to growth in the second quarter.

On the surface, political risks in the periphery also appear to have eased in the near term. The Portuguese government pledged to stick to its plans to complete a Troika-led bailout programme after narrowly avoiding the collapse of its coalition earlier in the month. Financial conditions have improved too, with the average eurozone government bond yield declining by around 200 basis points since late 2011. However the region is not out of the woods yet, as many important structural issues have yet to be addressed. Germany's reluctance to agree to a comprehensive banking union remains a contentious issue, but won't be clarified until after the upcoming Federal election on 22 September. We don't expect further flare-ups in the region before then and hope for signs of further progress towards normalisation towards the end of the year. Many of the eurozone's equity markets have rebounded since the sell-off in May and June, and continue to look good value, given the many high quality global companies based in the region. Further positive surprises in the economic data can only help to improve investor perceptions towards the region.


As expected, Prime Minister Shinzo Abe's Liberal Democratic Party swept to victory and took control of the Japanese parliament's upper house for the next three years, a relative eternity compared to the recent high turnover in Japan's political leadership. The victory reduces the political headwinds and paves the way for Japan to start implementing structural reforms, the so-called 'third arrow' of Mr Abe's radical economic plan. While this is what investors are looking for, enthusiasm for 'Abenomics' has waned a little in the last few weeks. Cooling investor sentiment is evident in both the recent performance of the equity market and the stubborn strength of the yen. Supply-side reforms are vital if Japan is to compete more effectively on the global stage and awake from economic hibernation. A key test of Mr Abe's post-election resolve will come when the Government makes its final decision on how quickly to implement a proposed rise in sales taxes. Despite the profit-taking, there are still reasons to remain upbeat on the Japanese equity market. Economic growth prospects are strong relative to its G7 peers, and the rise in consumer confidence is already translating into positive retail spending figures. Consumer price index inflation, excluding energy costs, has continued to rise and is on track to meet the Bank of Japan's 2% target within the next two years. Reflationary policies should continue to benefit the Japanese banks, which have performed strongly so far this year and remain attractively valued. As markets await more details of Mr Abe's plan of action, they are likely to remain volatile. The movements in the yen against the dollar will continue to drive the performance of equities.

Meanwhile in China, policy reform has also shifted to the forefront. The emergence of so-called 'Likonomics', named after Chinese Prime Minister Li Keqiang, has caught the eye of investors as growth concerns continue to weigh on sentiment towards the equity market. Unlike the expansionary aims of Abenomics, Likonomics includes a range of policies aimed at aiding China's shift towards a more laissez-faire economy, while reining in growth in the shadow banking system. We saw evidence of this with the recent squeeze on credit conditions in China's money markets. Mr Li has also announced a number of new economic objectives, including a floor to GDP growth, an inflation ceiling and targets for urban unemployment. While the economy remains in a gradual slowdown, policymakers in China are sending a message that they still believe they have the necessary tools to fine-tune a rebalancing of the economy. China's position as a net commodity importer makes it less vulnerable to the recent slowdown in commodity prices than many of its emerging market peers. While slowing growth in China is inevitable, the growing importance of the Chinese consumer remains a potential source of reward for overseas investors.

To read this Investment Outlook in full, please click here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.