Bears had a tough 2013. Too much went disappointingly right. Equities rose globally. The eurozone failed to fall back into crisis. Squalls in emerging markets faded. After initial missteps, the US Federal Reserve calmed investors’ worries about its plans to scale back, or taper, its asset purchases.
Even if markets ended the year in bullish mood, however, there is plenty that could go wrong in 2014. The share rally is based on expected, not actual, profits growth, but economic prospects remain fragile – especially in stressed European regions. The Fed has to gauge its tapering so as not to stall the US recovery, or shock emerging markets. And that is before all the unknown events that could throw up unexpected crises.
Top of many known worries lists is that the Fed’s control of events will slip. “The biggest risk for 2014 is definitely the risk of the Fed getting it wrong,” says Didier Saint-Georges, investment committee member at Carmignac.
US Treasury yields have risen this year but bond market volatility has been low. Mr Saint-Georges warns: “What is kept artificially stable is often what is most risky. It’s like the turkey analogy; a turkey that is fed regularly in the run-up to Christmas turns about to be the least safe bird of all.”
Mohamed El-Erian, chief executive of Pimco, worries about a mishap as central banks switch from “policy-induced growth to higher, durable and more inclusive private sector-led growth . . . In each case – that of the Fed, the European Central Bank and Bank of Japan – the policy transition is complex. It involves changes in an already highly experimental policy mix.”