There is some debate as to what Henry Ford actually said; "History is bunk" is the popular perception, although others will argue that he actually said, "History is more or less bunk." Who cares. The important thing to remember is that history is real, and that predicting the future comes down to a mixture of guessing, informed analysis and luck.
Some things, however, don't seem to change, and while the FTSE 100 index delivered a stronger performance in 2013 than in 2012, it was still another rollercoaster ride. Interestingly, in both years it was the period between April and June that caused the most hearts to flutter, with both periods experiencing a sudden and sharp fall in equity values.
In 2012 it was over fears that the eurozone was about to implode, while in 2013 a similar fall came as signs of an economic recovery encouraged rumours that the Fed would soon start to tighten monetary policy. In both cases, the trend was reversed as politicians and bankers sought to reassure investors that rocking the boat was simply not on the agenda - much in the same way that the US administration thought that the best way to solve what has become a disturbingly political financial problem was to once again kick the budget deficit can a bit further down the road.
For the UK, or at least for the government, the best part was watching the IMF steadily back-track on its predictions of gloom and calls for the UK authorities to relax the austerity drive. Interestingly, the UK economy avoided a triple-dip recession, and the IMF ended by forecasting growth of 1.4 per cent, exactly double what it predicted in April. But what do the major investment houses and brokers think is in store for 2014?
Goldman Sachs' view
Goldman Sachs has a target of 7,500 for the FTSE 100 index by the end of 2014, with a similar improvement factored in for equities in Europe in general. Indeed, corporate profits in Europe are forecast to grow by 14 per cent. Moreover, Goldman reckons that a steady secular upswing in the equity market can continue for some time. However, a selective approach is still going to be the vital investment tool, and Goldman is looking to be overweight in banks and housebuilders, technology, autos and luxury goods. On the downside, it suggests avoiding expensive defensives such as food and beverages, and companies with a significant exposure to commodities such as resources, industrial goods and chemicals.
Equities continue to be attractive not least because of the relatively high dividend yields against bond yields. The risk here is that bond yields start to rise as upward pressure grows on interest rates, which would reduce the current search for high-yielding equities. However, in the current cycle the yield advantage of equities over bonds may take longer to normalise.
Killik & Co's view
Killik & Co is looking for the FTSE to end 2014 at 7,400, with equities driven higher by above-average growth in the US and stabilisation in China and the eurozone. This would leave the market on a forward PE ratio of 13.8 and a net prospective yield of 3.8 per cent. Once again, small caps are expected to continue their strong performance into the New Year. These are seen as the faster-growing companies, and demand for shares in smaller caps will be underpinned by changes that allow shares trading on the Alternative Investment Market (Aim) to be included in individual savings schemes (Isas).
For the more adventurous, China provides scope for significant changes in areas such as market reform, infrastructure, healthcare and property rights. The reforms should help the economy rebalance more towards domestic consumption, which suggests that Chinese equities and companies with an exposure to China should perform well next year. Killik also suggests not going short on Japanese equities. The economy is recovering after a healthy fiscal and monetary stimulus, and while equities have risen significantly, valuations do not appear overstretched.
Killik also has its eye on 10 top tips for 2014: Rolls-Royce, HSBC, Unilever, InterContinental Hotels, Berkeley Group, Quindell, 888 Holdings, Amazon.com, Volkswagen and Apple.
BlackRock's view
BlackRock believes that the effects of tapering will be offset by forward guidance, that's to say that central banks will promise to keep interest rates low for a long time yet. It also has three possible paths that economies may follow. The first, which it gives a 25 per cent probability rating, is called 'Growth Breakout', where economic activity accelerates, with companies hiring and investing again, while margins remain elevated or rise still further.
The second option is called 'Low for Longer', with a 55 per cent probability, and where growth rates remain low, interest rates subdued, while revenue and margins struggle to expand. The third option is called 'Imbalances Tip Over', where deflation replaces inflation, central banks get their timing wrong on adjusting monetary policy, and company revenue remains flat.
BlackRock remains cautiously optimistic on European equities, where valuations are relatively low compared with US equities - these, BlackRock reckons, are already fully valued. European companies could notch up 8-10 per cent earnings growth in 2014, although remember that European blue chips are highly geared toward emerging markets demand, an area, incidentally, that BlackRock views as the only region that will see a rise in interest rates in 2014.
The UK is different from the rest of Europe because GDP growth is finally picking up, and BlackRock reckons that the UK could be the first economy to experience a true Growth Breakout scenario.
Threadneedle Investments' view
At Threadneedle Investments, tapering is expected to be the major issue affecting markets in the coming year. However, it is important to realise that tapering is not tightening but more a reduction in the level of stimulus. But it is also crucial to remember that all asset prices have been supported by a wave of global liquidity, so some volatility can be expected, notably in some emerging markets economies. Still, equities remain attractive, although they are not as cheap as they were a year earlier. However, on a yield basis they retain their attraction over government bonds.
These remain unattractive but less so following the spike in yields following speculation over the timing of tapering. Threadneedle believes this will start in the US probably towards the end of the first quarter. Margins in the US will remain elevated, while shale energy and low wage inflation will act as significant stimuli. US stocks will retain their attraction, but it is worth remembering that US stocks are already highly rated, and much of the good news might already be factored in. In the UK, Threadneedle expects GDP growth to reach 2.25 per cent by the end of 2014, while monetary policy will remain accommodative, and it retains an investment bias towards equities.
Merrill Lynch's view
Merrill Lynch points out that the US budget deficit has fallen from 10 per cent of GDP to 4 per cent, while the major banks are recapitalised and are working off their bad loans. Corporations are flush with funds and households have cut their debt servicing costs. All this supports the idea that US GDP growth will accelerate from an average of 2.2 per cent over the last four years to 2.6 per cent in 2014 and 3.2 per cent in 2015.
On the other hand, European growth is expected to remain weak, while the European central bank is not expected to provide any further stimulus. Eurozone GDP growth is forecast at 0.8 per cent, with unemployment stuck stubbornly round the 12 per cent mark.
How did the 2013 forecasters fare?
Pretty well, although in some cases not as well as the market itself. Near to the mark was The Share Centre, where investment analyst Helal Miah was also pretty spot on with the US deficit. At the time, he said: "We believe something will be done, compromises will be made, and that will be very good for the markets." True enough, the debt mountain has been kicked down the road once again, and any thoughts about effecting a change in monetary policy by introducing a taper on quantitative easing in 2013 were once again put on the back burner. BlackRock was spot on about the strong outlook for risk assets and the US economy gaining momentum, and also warned that the era of ultra-loose monetary policy may be drawing to a close.
■ This year will probably be more remembered for what didn't happen rather than what did. The eurozone managed to avoid a collapse, with all the members in the intensive care ward showing signs of recovery, notably Ireland and Greece. The meltdown as a result of the US economy defaulting on its debt was avoided once again. There were no oil price shocks or further signs of financial distress. And it may well be that a year's reprieve might be enough to reduce the possibility of something developing to push the global economic recovery off course. It will be fascinating to see how much investors elect to creep back from a passive investment stance to a more active one, and much of that decision will depend on how and when central banks go about reining back quantitative easing, which they must at some point. That may hold the key. One worry is that equities were substantially re-rated in 2013 in anticipation of earnings growth in 2014. And if that growth doesn't appear, there is room for significant disappointment.
