What should investors expect from 2014?

Despite its recent setback, the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) has delivered investors with enormous gains over the last year on the back of record low official interest rates and the US Federal Reserve’s stimulus program.

However, investors expecting a repeat of double-digit returns in 2014 should be cautious with the tapering of the Fed’s bond buying program imminent. It is unknown what impact the pending tapering will have on global equity markets.

For the year to 30 November, the benchmark index rose by around 22% but has shed 6.6% since hitting a high of 5457.3 points. In regards to the strong year, Patrick Farrell, head of Advance Asset Management and chief investment officer of BT Financial Group, said: “Valuations have been pushed and we now need to see some backfilling of earnings… If we don’t see that, the market is very susceptible to a correction from these sorts of levels.”

Whilst the easy gains from the share market may have already been realised, investors should consider expanding their horizons. For instance, instead of simply investing in the big four banks for their high dividend yields, investors should perhaps consider buying shares in less well-known companies such as Collection House (ASX: CLH) or TPG Telecom (ASX: TPM), which each offer attractive dividends and possess greater growth potential.

Another factor which investors must take into consideration is currency movements. The Australian dollar has remained strong compared to the US greenback in recent years, this has attracted significant foreign investment, however, a weakening of the Aussie dollar will see many foreign investors head for the exit.

Whilst that would not be such a good thing for the overall sharemarket, it would boost the earnings of companies which heavily rely on offshore sales. With analysts expecting the dollar to fall further to around US80c to US85c from its current value of just above US90c, UBS analysts are bullish on companies such as Amcor (ASX: AMC), CSL (ASX: CSL), ResMed (ASX: RMD) and Crown (ASX: CWN).

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Motley Fool contributor Ryan Newman owns shares in Collection House.

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