Thoughts on the 2014 markets

US markets have done pretty well over the last two years, and by that reason, to some, the emerging and EU markets look much more promising for this year.  That might be so, however, for an investor sitting in the United States, it’s sometimes very difficult to calculate the risks that come with investing in the emerging markets.

EU has done very well, over the last year. If you heard Mark Lasrey, someone I greatly respect, then there have been many turnaround opportunities in Europe which could have generated double digit returns. However, Europe has faced its own crisis, with unemployment still very high in some of the so called richer countries. Spain, France, Italy in particular are worth mentioning. Germany has performed relatively well over the last year or two – however it’s still tied to Europe in many ways. UK is doing well, but its more due to the easy monetary policies of the central bank. Global companies such as Nestle, however, are always a sure and safe bet.

The emerging markets have presented us with lot of opportunities as well, however, it’s very hard to gauge the political risks that comes with investing there. Recent slowdown in China, political opposition in Bangkok, sudden changes in rules ( for example gold) regarding imports in India, problems in Pakistan and Afghanistan, volatility in the Philippines should provide us with a note of caution – especially those sitting in US trying to play the emerging markets. Vietnam and Singapore might be good cases of investments, however, you better be visiting those places before putting your money to work.

Middle-east is a story that speaks for itself.  The markets in Brazil, Argentina, and Venezuela are not doing that great.

So this brings me back to the US and this year seems to be an interesting market – interesting because the Federal Reserve has started to taper and there is a change in guard. Stan Fisher is coming back as the vice-chair of the Federal Reserve and he has been a proponent of intervention in the past and so is Janet Yellen. I believe that those focused on the US markets investing for the medium term should focus on special situation equities.  I believe FY14 will present good opportunities for turnarounds, spin-off’s, and restructurings. Additionally, I also expect that FY14, given the political climate around the globe, will be a year in which stock markets as well as commodity markets will undergo a lot of volatility. Therefore, those who are looking to do well this year, are better off investing in companies that are light on debt (especially those firms whose debt is coming due in FY15, given the cost of debt will rise), have some yield with good margins and solid business model. Furthermore, the same companies, if they have a catalyst attached to them such as major divestitures, restructuring/turnarounds will perform better than the markets in general. This year might not be the year to bet on risky stocks that have done well in the past just because there was ample liquidity created by the federal reserve. I would say, in general, it will be a good year to play names and focus more on solid balance sheets rather than income statement!