BY all accounts 2013 was a petty good year for investors, writes Nick Williams at Brewin Dolphin.

Despite continued austerity and a further round of belt tightening, the FTSE 100 ended the year up nearly 12 per cent.

In the United States, the S&P 500 was up 26 per cent and even Europe was up 18 per cent.   

But that was then. What awaits us in 2014?

As ever, there are conflicting straws in the wind. In the UK consumer confidence remains low and persistently high energy and fuel bills have damaged sentiment and acted as a drag on the economy. However, while slow to pick up, it would appear that the UK recovery has been built to last.

The Funding for Lending and Help to Buy schemes have boosted the housing market and recent employment data suggest that the UK is experiencing a genuine recovery which will carry on throughout 2014.

By contrast Europe is no nearer to addressing its deep set problems than it was this time last year. True, the can of economic reform has been kicked a little further down the road and, as austerity is quietly abandoned, growth of 1 per cent or so across the region should alleviate some of the pressure to address the structural issues begat by the single currency.

However, youth unemployment of 57 per cent in Spain and 41 per cent in Italy risks decades of social and economic repercussions if not tackled soon while in France, increasing calls for the return of Nicolas Sarkozy are undermining Francois Hollande’s attempts at reform. Only Germany is experiencing anything like a normal economic trajectory.

And so to the United States which this year, as in so many before it, holds the key to financial markets.

As part of its programme of Quantitative Easing, the Federal Reserve Board has been printing money at the rate of $85bn per month and feeding this into the economy via the medium of buying back bonds issued by the US Treasury.

The full adjudication on the success of QE has yet to be pronounced but there is little doubt that the US recovery is substantive and has almost reached the “escape velocity” required to wean itself off the drip feed of liquidity.

When the long awaited phasing out or, ”tapering” of QE was first mooted last summer the markets lost around 12 per cent before recovering through the rest of the year. However, when it was formally announced just before Christmas that tapering would begin and that the $85bn per month would be scaled back to $75bn from January the news heralded a “Santa Rally” that saw the FTSE 100 Index gain 4 per cent and the S&P 500 reach a new high.

How times change.

Whether the taper will ultimately undermine markets depends upon the speed with which it is implemented. It is important to remember that while QE is being scaled back, monetary conditions are not being tightened and interest rates are likely to stay low well into this year, probably next and some commentators are forecasting no rise until 2016.

Under such a scenario, equities should continue to make progress. However, under QE, markets have taken a lot on trust and we need to see a pick up in non housing related bank lending, an expansion in business investment and an increase in real wage growth to confirm the next leg of the recovery is on course.

US tapering is not the end of the world but it does signify that the global recovery and, more particularly, the progress of equity markets have reached a new phase which will now require a fundamental improvement in economic conditions, as opposed to the promissory notes of a central bank.

Nick Williams is an Assistant Director at Brewin Dolphin and offers advice on a wide range of financial services to private clients, trusts, charities and pension funds. 

Past performance is not an indication of future performance. The value of any investment and any income can fall and you may get back less than you invested. No investment is suitable for all people and should you have any doubts you should consult an authorised financial adviser.

The information contained in this article has been taken from public sources and is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness. The opinions expressed in this article are not necessarily the views held throughout Brewin Dolphin Ltd. No Director, representative or employee of Brewin Dolphin Ltd accepts liability for any direct or consequential loss arising from the use of this document or its contents.