Business

What to expect in 2014

The Sterling Report

Pamela Lewis

Saturday, January 18, 2014    

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For the last two week, we have been doing a review of key variables and how they performed in 2013 and today we turn our attention to the outlook for 2014. Most investors are looking expectantly towards 2014 and are following every move in the market with bated breath. The market had mixed fortunes for some investors last year but there were some notable performances. Twitter had its IPO which opened at US$26 and quickly traded up to US$47 in one day. Facebook fell on the sword of Twitter, staggered somewhat but surprisingly lived to rebound to US$57. The Dow registered numerous highs during 2013, ending up 26 per cent for the year, beating expectation that the threat of Fed tapering would reverse the stock market's romp towards new highs. At the end of the year the FED announced that it would begin tapering (a programme to reduce its bond purchases) after months of "maybe we will" which fuelled much speculation in the market. Tapering is expected to conclude by October 2014 but will still be guided by economic data.

On the local scene, JPS, NROCC and the Government of Jamaica (GOJ) global and domestic bonds took a battering. No one would touch these bonds with a ten-foot pole and those who held these instruments, especially the local currency denominated bonds endured huge losses as the Jamaican dollar devalued by 14.5 per cent and a second debt restructuring also occurred.

The direction of interest rates did not help much either as rates started to inch up in the latter half of the year after the NDX, eroding the value of those bonds that had been restructured. With the uncertainty of local interest rates, investors holding Jamaican dollar denominated bonds would have to further discount their asking price for GOJ local instruments. Many investors quickly learned what it meant to invest in hard currency, as they saw their local currency investments dwindling sharply before their eyes.

We are now at the beginning of 2014 and the Government is being encouraged to lower interest rates as a matter of urgency. What will this achieve? First and most important is the confidence in the market. Without investor confidence the market remains flat and liquidity is stifled. Without liquidity in the market things can easily and quickly come to a standstill.

As we are in a global market space, it would be a good idea to diversify our portfolios by looking further afield to the international market. Most of these markets are recovering from the recession spell, making it an opportune time to purchase good investment instruments in the international market. If we look at US Treasuries (UST), we find that yields had increased during the latter part of last year, perhaps partly due to the FED's program to reduce its bond purchases. The 10-year Treasury yield had climbed to three per cent after the announcement, but has since declined to 2.84 per cent and is expected to remain very volatile as tapering progresses. This means that Treasury yields are expected to increase. This has implications for US municipal bonds which trade in line with Treasuries as the prices of these bonds should rise as Treasury yields rise. Therefore prices are expected to fall, provided the economic fundamentals improve as expected.

In addition, it is expected that the prices of corporate bonds will initially decline, but as the economies improve so too will the value of these investments as sales and profits improve. However, this will happen only if the entities are efficiently and effectively managed, so keen attention must be paid to the fundamentals of the companies in which the investor wishes to place his funds. Again, we should not ignore the fact that the Fed's stimulus has also helped in inflating asset prices fuelling the rise in the stock market, for example, tapering could also have a negative impact on the performance of the market in 2014. Potential investors are best advised to speak with expert portfolio managers who have managed to beat the market consistently over time.

Pamela Lewis is Vice President, Investments and Client Services at Sterling Asset Management Ltd. Sterling provides financial and advisory services to the corporate, individual and institutional investor. Feedback: If you wish to have Sterling address your investment questions in upcoming articles, please e-mail us at: info@sterlingasset.net.jm or visit our website at www.sterling.com.jm

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