2014 First Quarter Review | AAG Wealth Management

2014 First Quarter Review

Posted: April 30, 2014

2014 first-quarter commentary from Chris Ralph – Chief Investment Officer, St. James’s Place

Steady Horizons

The outlook for the global economy at the start of 2014 was optimistic, if cautious, and the sentiment remained in place as a mixed first quarter drew to a close. The global recovery has broadened but the pace of the improvement remains slow. The level of growth of the world’s two largest economies, US and China, continued to influence world markets, together with other developments over the quarter including the crisis in Ukraine, low Eurozone inflation and emerging market volatility. With political and economic threats, both at a micro and macro level, it remains crucial that investors focus on the long-term fundamentals rather than short-term headlines.

The advanced economies, led by the US, are expected to improve further this year, although the recoveries remain uneven. The International Monetary Fund (IMF) estimated that the world economy in 2014 will grow 3.6%, up from 3% in 2013, with the advanced nations gaining 2.2%, following a slow improvement of 1.3% last year. The US economy is expected to expand by 2.8% over the year and build on a restrained 1.9% advance in 2013. The Eurozone – led by Germany – is set to regain a positive momentum of 1.2% growth, following its 0.5% contraction last year.

The US Federal Reserve’s gradual exit from quantitative easing continued to act as a dominant influence on global markets in the first quarter. The Fed’s decision in December to start to taper its bond-buying programme triggered a retreat of foreign money from emerging to developed markets. The Fed has scaled back its monthly bond purchases in $10
billion increments at recent meetings, and buoyed developed world markets with its reassurances that accommodative policy and low interest rates will stay in place until the recovery is fully underway.

US equities in the first quarter struggled to continue the pace set in 2013, which saw the market’s strongest annual performance for a decade on the back of economic recovery
and firm Fed policy guidance. Despite further signs of consumer and boardroom confidence and rising corporate earnings, the S&P 500 ended the quarter up 1.3%, following a 29.6% gain in 2013. The severe winter weather-related slowdown of the US economy over the period also weighed on US stocks and shares.

Japanese equities also lost substantial ground over the first three months of the year in the wake of the impressive 56.7% rally in 2013. The Nikkei 225 Stock Average lost 9.0% amid uncertainty over whether Prime Minister Shinzo Abe could sustain the momentum of his stimulus package and achieve 2% inflation by 2015.

There are also widespread concerns that the sales tax increase introduced to help reduce the national debt could derail the recovery from decades of deflation.

Deflation Spectre
The spectre of deflation has also started to shadow the Eurozone over the first quarter, as its economic recovery remained slow, interest rates lingered at 0.25% and inflation fell in March to 0.5%. The STOXX Europe 50 was up 1.7% over the first quarter, following a 17.4% rise in 2013.

However, the Eurozone’s current account surplus at 2.1% of GDP has continued to boost global confidence in the underlying stability of the bloc’s nascent recovery.

The UK recovery broadened, with revised IMF estimates of annual growth of 2.9%, up from 1.8% in 2013, and ahead of other developed nations. The Bank of England has indicated that it will hold the base rate at 0.5% as business and consumer confidence rises and unemployment levels fall.

However, concerns linger over the UK’s policy-induced housing recovery. Despite expectations of a rise in corporate earnings, the FTSE 100 lost 2.2% over the quarter. Uncertainty over China’s slowdown, the Crimea and the US economy weighed on the international-orientated London market. The Fed’s tapering of QE continued to cause side effects for vulnerable central banks and economies in developing nations.

Asian and commodity-focused emerging market nations are particularly exposed to the rate of China’s slowdown from its 7.7% growth level last year and its build-up of credit.

Despite a sharp exit of international investors from emerging markets over the opening months of the year, the outflows began to ease towards the end of the quarter. The MSCI Emerging Markets index dipped 0.8% in the first quarter, extending the 5% loss it took in 2013.

Uncertainty over the world’s two largest economies and Russia, together with the continued expectation rather than delivery of earnings growth, helped global corporate bonds and high-yield debt return 2.9% and 2.7% respectively in the first quarter, outperforming the 0.8% return from the MSCI World index. Yields on both 10-year gilts and US Treasuries closed the three month period at 2.7% from 3% at the start of the year, as investors sought security from global economic and geopolitical risks.

Modest Returns
The world economy looks set to continue to recover at a modest pace over the second quarter and 2014, with the US, UK, Eurozone and Japan on track for steady, if unspectacular, growth. However, emerging markets are likely to continue to struggle through 2014. Low inflation moving into deflation in the Eurozone remains a risk, compounded by an escalation of the crisis in Ukraine. Global markets will continue to hinge on China’s economic news and the trajectory of US monetary policy.


The information contained is correct as at the date of the article. The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of AAG.

Alexander Associates Group (AAG) is a holistic Wealth Management group and provider of a wide range of complementary services. The wealth management advice, for both individuals and corporates, is provided by AAG Wealth Management, a Principal Partner Practice of St.  James’s Place Wealth Management. Other services offered by AAG fall outside of wealth management advice and are separate and distinct to the services offered by St. James’s  Place. They are not covered by the St. James’s Place guarantee*, which is solely reserved  for wealth management advice provided by representatives of AAG Wealth Management.

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AAG Wealth Management represents only St. James’s Place Wealth Management plc (which is authorised and regulated by the Financial Conduct Authority) for the purpose of advising solely on the Group’s wealth management products and services, more details of which are set out on the Group’s website www.sjp.co.uk/products. The `St. James’s Place Partnership’and the titles `Partner’ and `Partner Practice’ are marketing terms used to describe St. James’s Place representatives.


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