A View from the Bridge - December 2013

So that was the year that wasn’t in many respects but it was also a year of plenty, if you held the right assets.

There was not a triple dip recession in the UK as many predicted and at the end of the year the OECD predicted growth of 1.4% for the year and 2.4% for 2014, making the UK look like the best performing economy in the western world.

In Europe it was not a year of leaving the problems of high unemployment and low growth behind as many Eurocrats wanted us to believe, but more of the same leaving a clear division between the south and north and the spectre of deflation hanging over the entire Eurozone.

Over in the US it was not the year to bring in the tapering of QE on the back of strong economic performance as the economy stuttered and the politicians could not agree a budget.

Meanwhile in Japan, it was not the year of further deflation as monetary expansion resulted in inflation, a stock market up the most in a generation and the Yen down in value 22%.

As mentioned at the outset it was also a year of plenty for the right assets: classic cars, fine wines and vintage stamps were amongst the best performing assets of 2013. Reminds me of that scene in Brewster’s Millions when one lick of a vintage stamp renders it worthless!

The outlook at least in the UK is positive as economic activity picks up pace but the potential spoilers for 2014 include:

1. The Eurozone, economically and politically, being the single biggest risk to global financial stability.

2. The impact of the Fed tapering programme, particularly on some emerging market economies and

3. The liquidity crunch in China.

The markets ended the year mostly in line with the economic outlook; near term LIBOR rates remained relatively unchanged from the start of the year (3mth closed at 0.525% (+1bp), 6mth closed at 0.62%(-4bp). In contrast Fixed Term rates (longer than 1 year) were all higher jumping in line with the more positive economic sentiment in the last month of the year, the ISDA fixings were as follows - 5 Years closed at 2.15% (+113bp), 10 years closed at 3.01% (+114bp), 20 years closed at 3.43% (+70bp) and 30 years closed at 3.45% (+48bp)

Not surprisingly UK Government Bond yields were also higher. The 10 year UK Gilt Benchmark closed at a yield of 3.022% and the 30 year UK Gilt Benchmark closed at a yield of 3.665%.

GBP future inflation expectations expressed through 20 year Inflation Swaps traded over the year within a range of 3.18% and 3.7380% , closing towards the highs at 3.689%

In the Foreign Exchange Market GBP was relatively unchanged on the year against the USD$ at 1.6535 (1.6255) and the EURO at 1.2005 (1.2317)

Wishing all our readers a happy and prosperous 2014.