Top 10 trade ideas for 2014. Proposition #10: Pitfalls to overcome in 2014
- US inflation: If the US employment market doesn’t recover in a more gradual manner, it could well be the case that the US economy overheats. If the Fed’s monetary policy has no effect and the expected economic recovery fails to appear, a financial repression could accompany investors in the years ahead
- EU inflation: The rate of inflation is expected to be lower than consensus estimates. What action will the ECB undertake under such circumstances? Whatever it does, it will result in a weaker Euro.
- Growth in China: A new growth cycle in China is only expected to start in late 2014. However, due to structural problems (e.g. lack of healthcare and retirement plans, ever increasing income inequality, level of air and water pollution, etc.) this cycle shouldn’t last long.
- Brazil and India: Both countries urgently require structural reforms (India: abandonment of the caste system; Brazil: social inequality, illiteracy and lack of infrastructure and housing). Once these subjects are addressed, the foundations for the next economic cycle will be set. Further delays in these reforms mean that investment opportunities remain uninteresting.
- Russia: Structural reform and privatizations could unlock substantial investment opportunities. However, the state is omnipresent and often interferes in the day-to-day business of private entrepreneurs.
- Ratings: S&P and Moody’s could put a number of countries on their review lists with the potential for a negative outcome. The lists might also contain a number of European countries.
- Energy sector: The problems in the Middle East are important. The Iranian government has made a very strong strategic move in establishing diplomatic contact with the US government. This could be seen as endorsing its possible involvement/allegiance with Syria. How will Saudi Arabia and Israel react? An erroneous interpretation of the situation could push oil prices to higher levels.
- Hungary: In the past, a number of foreign banks have provided mortgage loans in foreign currencies. As a result of mis-selling, the affected people require full reimbursement for the damage caused; these claims could result in a precedent. Swiss and Austrian banks were the leaders in this business.
- Ukraine: In the event the political maneuvering between the European Union and Russia is prolonged, the state of Ukraine will be pushed into bankruptcy.
- Technology stock crash: The ‘Big Six’ technology firms – Amazon (P/E > 1400), LinkedIn (P/E >730), Netflix (P/E > 276), Facebook (P/E > 117), Twitter (P/E n/a), and Yelp (P/E n/a) – could be subject to a substantial deflation in 2014 as these stocks trade at unrealistic P/E Levels, i.e. in excess of 100 times their earnings, or do not produce any profits yet. This exaggerated exuberance is due for a correction and may impact the overall market at the same time.
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