Global Market Commentary

January 02, 2014

Our Outlook for 2014 in Brief

North America

U.S.: As we have been saying, the economy in the U.S. will grow in 2014 by a surprising amount. Corporate spending is rising and employment will follow. We anticipate U.S. GDP growth real growth of 3.5 percent and inflation of 1.2 percent, for total GDP growth of 4.7 percent. We remain bullish on U.S. stocks. We expect corporate profit growth of 14 percent in U.S. and a rise in stock prices. We expect higher interest rates.  Should rates rise more rapidly than the GDP, we will reduce our exposure to stocks as it could damage market sentiment. Of course, rising interest rates are bad for bonds.

Canada: Canada should show total GDP growth of 4.5 percent, inflation of 1.2 percent. We remain bullish on selected Canadian stocks. We believe that corporate profits in Canada will be partially tied to the price of oil, natural gas, grain, timber, and minerals. We anticipate higher mineral and timber prices, lower oil prices, and overall it should be a decent year for Canada. We expect corporate profits growth of 8 percent. We expect rising interest rates in Canada, so investors should avoid bonds.

Mexico: Keep an eye on the battle between entrenched corrupt interests in government, labor unions, and business and the Peña Nieto government. If the oil fields are opened to international technology, if the corrupt teachers’ union is brought to heel, and if the monopolies that have been gifted to the politically connected businesses are removed (that’s three big ifs) — Mexico can grow at a rate of 5 to 7 percent. If not, growth will be less. We will monitor Mexico carefully for an indication of which way the battle goes. Interest rates will rise here too — avoid bonds.

Asia

Japanese Exports

Exporting nations of Asia will be benefitted by (1) a recovery in the U.S. economy and expansion of U.S. growth; (2) a stabilization of European growth leading to increased imports; and
(3) exports to Japan — helped by the decline of the Yen and the return of business confidence in Japan. Avoid bonds — interest rates will rise in Asia too.

Japan: GDP will grow by about 4 percent and inflation will exceed 1 percent, which is a positive for the Japanese who are trying to come out a deflationary trap. Better growth will be
led by a continuing decline in the Yen, which improves the sale of Japanese autos, heavy industrial products, and other exports. Japan will import more raw materials and subcontracted supplies
from neighbors in Asia, and export more to Europe and the U.S. Japanese corporate profits can grow by 40 percent for global export oriented companies, and 15 percent for the country as a whole. We remain bullish on Japanese stocks. Be sure to hedge the Yen if you buy Japan — and avoid Japanese bonds.

China: We expect good growth in the 7 to 7.5 percent GDP range, which is a very strong rate of growth for an economy of China’s size. China is the world’s second largest economy. The reason that we are not bullish on Chinese stocks is because the government is being forced to do repeated short-term squeezes on the non-official lending sector — unofficial banks and illegal lenders who are over-levered. Further, the government is trying to tighten the reins on provincial governments who have engaged in and encouraged too much real-estate speculation. This week even corrupt politicians who sold votes are being attacked. Interest rates have been rising in China, and that will continue.

Europe

DraghiAs a whole, Europe is recovering. Inflation remains minimal, and economic confidence is gradually returning. The banking system is still greatly undercapitalized. Optimists point out that Europe’s banks are mostly government controlled, and will get cash from sovereign governments should a crisis occur. At GIM, we believe that banks of Europe are in danger of bail-ins if any illegal money laundering can be proved. Clearly, owners of bonds and stocks of banks in Europe as well as some depositors are taking risks that we suggest avoiding. We are bullish on certain industries in Europe. We suggest investors stick to European stocks in the energy, industrial, insurance, and pharmaceutical sectors. Within these sectors we expect profits growth of abut 15%. Interest rates will rise, and could cause a correction in European stock markets if they rise faster than the economic growth rate.

Russia: We remain very concerned about the fact that Russia is becoming more and more of a dictatorship, and we do not see it as a good environment for investment.

Global Summary

We expect a rise in global economic growth in 2014 and global GDP growth of 5 percent plus.

Investment Strategy

Stay long U.S., Japan, and Europe. Watch interest rates for a rise that exceeds the national economic growth rate. If interest rates rise too rapidly, we will sell stocks. In our opinion, gold will bottom in 2014, and inflation will increase by a modest amount in the developed world. Inflation should stay at low levels throughout 2014 in the developed world, but will rise in the developing world if a shortfall in food grain crops occurs.

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