City Watch: Charles Sylvester on how the first quarter of 2014 has failed to follow the script

Charles Sylvester of Charles Stanley & Co, Ipswich

Charles Sylvester of Charles Stanley & Co, Ipswich - Credit: Archant

As we head to the end of the first quarter of 2014, investors are pondering the outlook for the second quarter and beyond.

Returns from asset classes have not proved to be anything like those anticipated at the beginning of the year. Those investors who chose to sit in bonds and credit are likely to have achieved better returns from those who switched into equities.

Within the equity universe, emerging markets underperformed developed markets and Europe’s periphery outperformed its core. Little of this was in the script. Although the emerging markets crisis that blew up in January has generally dissipated, geopolitical risks remain elevated, especially those associated with the eventual outcome of events in the Ukraine.

In terms of economic activity, China, Japan and the US are the three largest economies in the world, and each is in the midst of policy change which may have profound long-term significance. Although US activity is expected to rebound from its “soft patch” in the second quarter, the Federal Reserve is steadily bringing its quantitative easing programme to a conclusion.

The Chinese authorities are grappling with deflating a substantial credit bubble without causing it to burst. Japan is poised to lift its Consumption Tax from 5% to 8% on April 1. The last time the tax was increased, from 3% to 5% in 1997, the economy slide straight into recession.

Adding to the uncertainty, possible economic sanctions, if

pursued against Russia, could serve to take a bite out of growth expectations, especially in Europe where Russian imports are relatively important.

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Perhaps we’re over-obsessing and these potential headwinds will dissipate. Longer term, investors are likely to retain overweight equity positions (equity risk premiums have fallen from the elevated levels of two years ago but still point to positive returns); meanwhile shorter term investors probably have some head scratching to do.

: : Charles Sylvester is an investment manager with Charles Stanley & Co in Ipswich.