James Ashton: Lessons of the year when things finally got better

As 2013 turns out far stronger than anyone predicted, 2014 will be about translating optimism into solid results 
19 December 2013
WEST END FINAL

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There is a certain artifice to reviewing the business year just ending, as well as predicting what the 12 months ahead will hold.

Business rarely thinks in calendar years. At one end of the spectrum, retailers live or die by their last six weeks of trading, especially come January when festive winners and losers will be revealed. Compare that with long-term investors such as the Wellcome Trust, the medical charity which announced sparkling investment returns yesterday. Chief investment officer Danny Truell is already projecting how his £15 billion portfolio can keep up 10 per cent returns over the next decade to match its performance over the past 20 years and funnel more money into valuable projects such as London’s Francis Crick Institute.

However, looking back is useful for the clues it offers to the future. This time last year, the economy was in the doldrums. George Osborne was getting ready to explain away a triple-dip recession. Chief executives were sitting on their hands or still cutting costs.

Yet the FTSE 100 had met most of the expert forecasts for where it would end the year by late spring. Even though the value of the blue-chip club went sideways after that, the Dow Jones index shot up by 20 per cent over the year, setting a series of new records. Part of the secret to Corporate America’s success was the Federal Reserve’s bond-buying programme to shore up confidence. That mix of cheap debt and cheap power from the shale gas revolution has been intoxicating.

In Britain, confidence trickled back in a string of areas such as the service sector and manufacturing, where consumers started spending again, although export growth was slower than hoped and the flow of foreign direct investment into Britain paused for breath.

So 2013 has turned out to be far better for business and the global economy than virtually anyone predicted. The trick now is to ensure that the optimism percolating into 2014 isn’t overblown. In the long run, the bulls and bears are both wrong. The true path forward is usually somewhere in between the peaks and the troughs.

Dozens of investment professionals can’t be wrong, can they? But beware the herd mentality now that the bulls are running again. A fund manager survey from Bank of America Merrill Lynch found that 71 per cent expect the global economy to strengthen next year, compared with 40 per cent a year ago. The same exercise found that 41 per cent expect corporate profits to rise, up from 11 per cent.

Over coffee this week, a supremely positive Steve Varley, managing partner of accounting and consulting firm EY, talked about the “sod-it economy” in which directors sitting around the boardroom waiting for conditions to improve markedly had got bored with waiting and decided to strike out with new investments and expansion plans regardless. In a similar vein, there is a hope that the British economy finally starts motoring in 2014 simply because it has to at some stage — after the slowest recorded recovery from the deepest recession experienced in Europe.

There is evidence that it will: falling unemployment, cooling inflation and an end in sight to the decline in real-term wages. It really has been a dream start for Mark Carney, the reforming Canadian who became Governor of the Bank of England only in summer.

Asset managers also talk about strong interest in sinking money into Europe, especially from Asia. That could correct an imbalance in stock-market valuations which explains the trend for American takeovers of European firms and why telecoms giant AT&T is regularly cited as stalking FTSE giant Vodafone. Next year looks like a bright one for listings too. After the success of the Royal Mail flotation, many more companies have taken share-sale plans out of the deep freeze, giving investment bankers hope for a brisk spring.

But there are some negative factors that could hold back the party. Chief among these is the Fed’s phased reduction in its $85 billion per month of bond-buying, which will foreshadow the timing of Britain’s own withdrawal of quantitative easing. Global markets took the announcement of the $10 billion shrinkage in the asset-buying programme in their stride overnight. Carney talked this week about the risks of ending stimulus — a time when the economy really will have to cycle ahead without stabilisers.

In addition, the sheen has come off emerging markets. Miners are gaining in confidence that China, whose vast consumption accounts for about half of world commodities, will press on, but progress in India is on ice until after elections in May. In Europe, Brussels’ creation of a banking union to finance the safe closure of ailing lenders is welcome. However, senior bankers in London fear the European Central Bank has set itself an uphill task to comb through the balance sheets of dozens of eurozone banks in less than a year in search of hidden toxic debts. Getting that exercise wrong again could dash confidence in the recovering economic bloc.

One thing is for sure: London will continue to thrive. Corporation tax cuts designed to attract foreign headquarters to Britain are actually drawing most of those new arrivals to the capital. Overseas money is snapping up chunks of property on an almost daily basis, making the West End once again the world’s most expensive office market. Wannabe global hubs such as Dubai and Singapore can’t compete with our culture or schooling.

As the year turns, the mood is more glass half-full than half-empty. After a five-year hiatus, deals are flowing and corporate life is steadying. Stock markets will be hard-pressed to keep up the pace of 2013 but they will still move smartly ahead. It is managing a return to normality which will ensure many more Happy Christmases to come.

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