It has been a sluggish start to the year for the Australian sharemarket with the S&P/ASX 200 (ASX:XJO) down 6% to date in 2014. However, favourable macroeconomic conditions should see the ASX rebound throughout 2014 as a result of the following favourable trends:
1. Falling Australian dollar and low interest rates
The Australian dollar has fallen from above parity with the U.S. dollar, flirting around the US$1.10 12 months ago to its current level of 90c. Analysts are forecasting the currency to fall further during 2014.
A falling Australian dollar will increase Australia's competitiveness. It is a positive for companies with offshore earnings as earnings increase once they are converted into Australian dollars. Companies set to be benefited include CSL (ASX: CSL) and QBE Insurance (ASX: QBE). Further, a lower Australian dollar will help offset the high Australian cost base.
Lower interest rates are also having a positive impact as evidenced by the recovery in the housing sector. A low interest rate environment will also result in investors moving money out of term deposits and into the sharemarket in a search for higher dividends on offer in the sharemarket.
2. New government and improving consumer and business confidence
Business and consumer confidence will continue to improve with the new Liberal government, providing much needed stability to business and consumers. Consumer confidence hit rock-bottom during the days of the Labour government.
Continued strength in the housing sector and an improving U.S. economy will also help improve investor confidence. Retail figures released by the Australian Bureau of Statistics show that retail sales increased by 0.6% in December 2013, highlighting confidence is beginning to return.
3. Booming IPO market
The Australian initial public offer (IPO) market has boomed during the last 12 months including the successful floats of Virtus Health (ASX: VRT) and Ozforex Group (ASX: OFX). Importantly, the strong IPO market is set to continue into 2014, with a leading underwriter expecting between $7 billion and $8 billion of IPOs by 30 June 2014.
The IPO market often occurs at the start of a bull market and is a precursor to mergers and acquisition activity.
Foolish takeaway
An improving Australian economy and investor confidence should result in the ASX moving higher in 2014. However, Foolish investors should be selective and invest in sectors that will benefit from favourable macroeconomic trends. These include stocks exposed to the improving U.S. consumer, the declining Australian dollar and improved housing construction, for example CSL and Boral (ASX: BLD).
