Taper talk continues to dominate markets – and US boom worries
But bulls are confident the Fed and global central bankers will ease off on liquidity rather than halt it
A man walks past Deutsche Bank offices in London. The bank says: ‘the best moments to buy equities are when credit growth is negative and the credit impulse has the potential to turn positive and this is where we are in Europe.’ Photograph: Luke MacGregor
“You’ve got to earn, baby, earn.” Japanese bank Nomura’s recent prediction that the global financial crisis is over may not be shared by all, but it’s easy to argue 2014 will indeed see a diminished focus on macroeconomic risks and a greater focus on company earnings, which need to grow to build on 2013’s strong gains.
For now, taper talk continues to dominate markets, although bulls are confident the Federal Reserve and global central bankers will ease off the liquidity pedal rather than hit the brakes. Markets have written off the idea of a rate rise in 2014, largely accepting the Fed message that tapering of bond purchases is not the same as tightening.
No sounding the alarm – yet
Even if it all goes smoothly, there are obvious valuation concerns. Nobel economist Robert Shiller is “most worried about the boom in the US stock market” even if he is “not yet sounding the alarm”. US earnings rose just 4.5 per cent in 2013, with S&P 500 gains driven by an expansion in its price-earnings ratio from 13.7 to 16.5.
Nomura’s contention that equities need “more of a growth rationale for upside” is shared by Morgan Stanley, which says investors are “on the verge of a major transition from a liquidity-driven world to one that is more growth-dependent”. With the equity bull market nearing its fifth anniversary, “outsized opportunities are behind us and returns on offer are more modest”.
The earnings rebound is in its infancy in Europe, which many tip to outperform. UBS predicts European profits will surge in 2014 while Deutsche Bank sees 20 per cent upside for the German Dax, adding: “The best moments to buy equities are when credit growth is negative and the credit impulse has the potential to turn positive and this is where we are in Europe.”
Increased profits forecast
Citigroup, too, expects strong Europe outperformance, saying earnings should grow faster while there is also “greater scope for re-rating given relative valuations”.
Goldman Sachs echoes the theme that 2014 will see a transition from the “hope or valuation-driven phase of the cycle” to a “slower but longer growth phase” driven by increasing profits.
European valuations are nowhere near as testing as in the US, but indices have doubled since 2009, despite lower earnings.
It’s normal in recoveries that valuation multiples expand long before earnings do, but investors’ patience may be tested if the anticipated profits recovery does not materialise.
The liquidity glut, coupled with an easing of economic risks, has driven global markets higher. The year 2014, analysts suggest, may be the one when earnings finally take centre stage.