JEDDAH — 2014 is increasingly looking like a year without a clear asset class winner. Last year it was stocks, mainly among rich economies (Nasdaq generated 35 percent returns while the German DAX rose by 25 percent), and the year before was bonds (10 year US treasuries hit an all-time low of 1.39 percent). Asiya Investments said in its new study that domestic factors are beginning to become more important market drivers. It said that the more heterogeneous financial environment makes it more difficult to make broad-based investment calls, but at the same time it offers a greater variety of investments. For instance, India's stock market grew by around 35 percent year-to-date as a result of an important transition of government which has boosted confidence and increased the likelihood of seeing structural reforms and infrastructure projects implemented; the Shanghai stock exchange rose more than 20 percent as authorities continued to gradually liberalize the financial sector and tweak policy, most recently cutting lending and deposit rates and launching the Shanghai-Hong Kong connect, enabling stock investments between the two markets; and the Dubai financial market is around 35 percent higher than at the beginning of the year as investors have been pricing in on the Expo 2020. The next key policy decision is the timing of the hike on interest rates in the US. Higher rates may lead to lower corporate earnings, weaker stock market performances and higher bond yields. Emerging markets will most likely be relatively impacted, possibly through currency runs and higher financial costs. However, monetary policy is highly loose in many other economies, and this could support the prospect and variety of investment returns. The European Central Bank, the Bank of Japan and the People's Bank of China have been undertaking large stimulus measures, and all are expected to maintain their stance even if the US Federal Reserve begins to tighten policy. The reduced involvement of the main asset price driver will decrease the chances of seeing an outright asset class winner; investors should spread their portfolio risks and invest more based on specific fundamentals as the global economy gradually returns to normality. Commodities had a good run in the years following the global financial crisis, with gold being bought as a safe haven, while the price of industrial metals soared on the back of a Chinese economic recovery and crude oil prices hit all-time highs following the instability in the Middle East and North Africa region. This is no longer the case. For two consecutive years, commodities have considerably underperformed as an asset class. Agricultural, energy and metal prices fell since the start of the year. Brent crude is 30 percent down while gold is relatively unchanged. Most currencies worldwide also lost value against the US dollar, which gained around 10 percent since January, as indicated by the dollar index. Stocks and fixed income are still generating positive returns, but less than before, and the gains vary widely across markets. In recent years, monetary policy has been the most important driver of asset performance. The three quantitative easing (QE) programs of the US Federal Reserve artificially lifted prices across all assets. Sovereign bond yields fell to all-time lows and stocks surged to unprecedented levels. The new neutral stance has eliminated this factor, creating more uncertainty. As such, investing in stock markets so far this year has been much less rewarding than last year. The Morgan Stanley Composite Index (MSCI) World rose less than 5 percent this year compared to nearly 25 percent in 2013. The same applies to sovereign bonds, whose yields are lower than at to the start of the year, but remain well above the lows reached in 2012. The Federal Reserve's pullback has created greater uncertainty and more diverse trends among asset classes and markets. America's Nasdaq increased around 15 percent year-to-date while European markets (Eurostoxx 600) rose by only about 5 percent. — SG
