Focus on the Big Picture as the US economy gains momentum

2014 has started in an uncertain and volatile fashion. China concerns, geopolitical risk plus emerging market anxiety over capital flight saw significant volatility in financial markets. The first quarter is over and many investors are left wondering if this is a year where we may end up with very volatile and poor markets. So far, year-to-date risk assets have underperformed while the usual flight to safety assets have outperformed. Are we missing something here?

Let us look at why markets have underperformed. So far this year, markets have been whipsawed on concerns about the economic momentum in the US, worries on the state of China's overall economy, plus unexpected geopolitical concerns over Ukraine. In the US, economic data does indicate a modest recovery which should see the Fed continue its tapering process. And now concerns have turned to when the Fed will start to raise interest rates. US data from payroll to manufacturing and consumer confidence and spending, seem to indicate underlying strength but if we look at the labour slack and inflation data, it seems the Fed could wait quite a while before they raise interest rates.

The other major concern out there is China. Most of the economic data appears to indicate a slowing economy. Manufacturing, exports, retail sales are all pointing to a decelerating economy and the government recently did acknowledge this by announcing a mini targeted stimulus to help the economy along. We still are optimistic that the Chinese economy may attain its 7-7.5 per cent growth this year but it is likely to require help from exports and government spending.