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2014: Investors’ Year of Living Dangerously

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Pacific Money

2014: Investors’ Year of Living Dangerously

With the Fed taper set to begin, how will the region’s bourses perform next year?

2014: Investors’ Year of Living Dangerously
Credit: Tokyo Stock Exchange via Shutterstock

Asia’s Year of the Horse could be a rough ride for investors, with the U.S. Federal Reserve predicted to start tapering its massive bond buying program as early as January. After this year’s strong gains in Japan, could 2014 be the year for other Asian markets to shine?

Rising Sun to Fade?

Helped by “Abenomics,” Japanese equities have had a remarkable 2013, with the benchmark Nikkei Stock Average posting a 67 percent rise in the year to December 10. On December 3, the Tokyo bourse reached 15,749, its highest level since December 2007 and ensuring plenty of yuletide cheer for stock buyers.

According to Bloomberg data, the Tokyo Stock Exchange’s broader Topix index has been the best performing of 24 developed market indices, aided by “unprecedented monetary easing” by the Bank of Japan and a weaker yen.

Yet according to the Nikkei Asian Review, “market players in Tokyo are starting to realize that next year in the Asian zodiac is the year of the horse. The psychological big deal about this is that since 1950, years of the horse have been the worst performers for Tokyo stocks among the zodiac’s 12 animals.”

The report noted that the Nikkei has declined by an average of 7.5 percent during the five most recent horse years. Fiscal 2014 will see a hike in the consumption tax to 8 percent, dragging on consumption.

On the other hand, ANZ economists have forecast 1.8 percent gross domestic product growth for Japan in 2014, pointing to the recent rise in the Tankan index of corporate sentiment as a sign that reflationary policies in the world’s No. 3 economy “are succeeding.”

China Recovery Tipped

Asia’s biggest economy may have slowed in 2013, but the benchmark Shanghai Stock Exchange Composite Index has still posted a respectable 10.7 percent gain in the year to December 10, a performance matched by Hong Kong’s Hang Seng Index.

While GDP growth is expected to slow to around 7 percent in 2014, analysts at Goldman Sachs expect Chinese stocks to post a strong turnaround.

According to Goldman analyst Noah Weisberger, the Hang Seng China Enterprises Index (HSCEI) or H-share index, will climb by 18 percent to reach 13,600 by the end of 2014 – its biggest advance since 2009.

“Equities are our favorite asset class in an environment where growth is moderate but not overheating, while policy makers remain accommodative,” Weisberger told Bloomberg News. “For the first time in the last several years, we would argue to own exposure to China through the Chinese equity market.”

Seoul Seeking New Record

After posting only a 3 percent gain in the year to December 10, South Korea’s benchmark KOSPI index is tipped to perform better in the year ahead.

According to BusinessKorea, experts from 15 investment banks expect the KOSPI to jump by 18 percent in 2014 to reach 2,341, surpassing the previous record of 2,228 set in May 2011.

“The reason for global investment banks’ positive outlook on the Korean stock market lies in the fact that local firms’ profits are expected to increase in 2014, and stock prices are still considered to be undervalued,” the Korean business daily said, noting strong recent buying by foreign investors.

Singapore Slings Higher

Singapore has also underwhelmed in 2013, with a 2 percent gain in the benchmark Straits Times Index in the year to December 10.

Nevertheless, improved corporate results could point to a better 2014, according to OCBC Investment Research.

“While the Singapore stock market is likely to end 2013 flat, the economic outlook for 2014 holds some potential for a re-look at Asian and Singapore equities,” OCBC was quoted as saying by Singapore Business Review.

“However, the recent [third quarter] corporate results in Singapore point to a cautiously optimistic guidance for 2014, and this could mean high single-digit earnings growth for the benchmark [Straits Times Index] stocks,” it added.

Australia’s Good Times Fade

Australia may be on the verge of reclaiming cricket’s “Ashes” from traditional rival England, but the nation’s renewed optimism has not affected analysts.

“Valuations have been pushed and we now need to see some backfilling of earnings, the major drivers of those earnings and economic activity,” BT Financial Group’s Patrick Farrell told the Australian Financial Review.

“If we don’t see that, the market is very susceptible to a correction from these sorts of levels.”

Helped by record low interest rates, the benchmark S&P/ASX200 index has posted a solid 20 percent gain in the year to December 10. However, slowing economic growth and expectations of no further rate cuts could see equities struggle to repeat the performance in 2014.

Meanwhile, among emerging markets ANZ expects Malaysia and the Philippines to lead the pack in growth performance, while India, Indonesia and Thailand lag.

“Emerging Asia has been a clear beneficiary of the liquidity created by the unconventional monetary policy of the old-world’s central banks,” ANZ said in a December 6 research report. It pointed to a “tension between an improving real economic outlook…and the anticipated withdrawal of generous liquidity” from the Fed.

With market winners rarely repeating the performance two years in a row, Asian investors might cast their eyes at some of the region’s weaker markets for better results in 2014, despite the threat of the Fed.