Cyclical Assets Outperforming
As we noted in last Friday's blog entry, one of our global themes for 2014 is that safe havens are no longer likely to be in such hot demand as economic uncertainty subsides in the US and Europe, potentially negatively impacting gold, low-yielding fixed income, and non-cyclical stocks.
One way of 'proxying' risk appetite is by looking at the ratio of consumer discretionary stocks to consumer staples stocks (using the MSCI World indices), which shows the performance of economically sensitive cyclical assets versus their non-cyclical counterparts. This ratio has risen in discretionary stocks' favour substantially since mid-2013, alongside the rise in US Treasury yields.
Apart from showing an increase in risk appetite as investors rotate out of bonds and into stocks, it also suggests that the move higher in UST yields has been mainly the result of stronger growth expectations in the US, rather than simply a reaction to possible Fed tapering.
Overall, 2014 has picked up where 2013 ended, and we believe that the outperformance of assets geared to stronger growth (in the US and Europe primarily) can run for a few quarters at least. We maintain our long-held views that developed market equities will continue to outperform emerging market (EM) stocks, and we continue to favour equities over bonds.
Our full range of financial market views is available to subscribers at Business Monitor Online.
This Week's Trivia Question
Last week, we asked, "which two religious institutions agreed on December 20, 2013, that they would compete against one another on the cricket pitch for the first time in September 2014? (Hint: the two institutions diverged in the sixteenth century.)" The answer is the Vatican and the Church of England.
This week's question was inspired by news that New Jersey governor Chris Christie has fired an aide who allegedly orchestrated traffic jams to settle political scores with a Democratic mayor who did not endorse his re-election. Our trivia question is, which former president (in the world, not US president), who left office in 2013, held a PhD in traffic management? (Hint: his country has been at odds with the US for almost exactly 35 years.)