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Two World Markets to Watch and One to Avoid in 2014

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International markets have been all over the map for investors – not just literally, but also in terms of returns. Japan’s Nikkei 225 Index emerged as a global market darling this year, pulling in gains of more than 45% year to date. Meanwhile, China has fallen off the course after so much hype at the dawn of this decade.

Hong Kong’s Hang Seng Index has crawled by only 1.7% – a stunning predicament investors didn’t see coming, and all the more shocking in light of the big gains seen in the U.S. and other markets this year.

But enough about 2013. Which international markets deserve your attention now before 2014 rolls around? Here are two markets to keep your eyes on – and one to avoid – for next year.

Japan steps on the stimulus pedal

The first market to watch for next year isn’t a particular surprise. If Japan and the Nikkei haven’t captured your attention already, it’s time to take a closer look at the Land of the Rising Sun.

You might find it hard to imagine that the Nikkei and Japanese stocks can top their performance this year, and you’d likely be right. Investors probably won’t see 40% or greater returns in 2014 from this market – or any market, really.

Japan’s bold stimulus move caught everyone off guard, leading to big gains we saw at the beginning of the year. However, Japan’s momentum isn’t finished.

Prime Minister Shinzo Abe is advancing stimulus with a full head of steam. Tokyo is preparing a new 5 trillion yen – approximately S$65b – stimulus package for the first half of next year to keep the economy and businesses on track, with some of that going to tax breaks for corporations.

Japan’s newly approved sales tax, meanwhile, will help assuage fears about the country’s burgeoning public debt – the largest such burden in the world. Finally, Abe’s fight against inflation should help to continue driving down the yen, which makes for a strong situation for leading Japanese exporters going forward.

How can investors expose themselves to the improvements going on in Japan? Some Singapore-listed shares with a huge exposure to the country include the Lyxor Japan (Topix) Fund 10 (SGX: CW4) and Saizen REIT (SGX: DZ8U).

The former tracks the TOPIX Gross Total Return index, which consists of the largest Japan-listed companies in terms of market capitalisation. The latter, on the other hand, is a real estate investment trust that owns residential and residential-related properties in Japan.

Should Japan power through 2014 strongly, both shares can likely ride on some beneficial headwinds.

China looks to rebound

China, the laggard of 2013, should see a much better 2014.

Many Chinese stocks haven’t performed up to snuff this year. The Hang Seng’s performance is just one example of that. However, while Wall Street has lamented the vague signals from China’s recent Third Plenum, an important economic and policy meeting, there are hopeful signs from Asia’s giant for investors.

The Third Plenum might not have said much specific, but it offered up a strong, broad path for China’s long-term future.

China is still transitioning toward the market economy that investors need, but the Plenum’s commitment to cutting back investment restrictions and boosting the support of private enterprise – while still furnishing state-owned enterprises that have long played a major role in the Chinese economy – set a solid foundation for Beijing to build upon without locking itself into a single, overly specific direction.

Don’t expect to see Japan-like growth out of China next year, but the Hang Seng should rebound from its lacklustre 2013 performance so long as China beings to pivot toward embracing private business.

For Singaporean investors, there is no shortage of opportunities for those who wish to have a piece of the action in China and Hong Kong through our local stock market.

Some examples include: Fortune REIT (SGX: LG2U), whose portfolio consists of 17 retail malls and properties in Hong Kong; CapitaRetail China Trust (SGX: AU8U), which owns a total of nine shopping malls in China located in cities that include Beijing, Zhengzhou, and Shanghai; and Mapletree Greater China Commercial Trust (SGX: RW0U), a commercial and retail REIT that owns the Festival Walk property in Hong Kong and the Gateway Plaza in Beijing.

Stay away from France

France’s CAC 40 stock index has made a nice year out of 2013, surprisingly, gaining more than 13% year to date. Yet France isn’t a market investors should toss money into without some serious research heading into the future.

S&P’s credit rating downgrade this month is only the latest blow to hit this beleaguered economy. The eurozone as a whole has struggled to emerge from the recession, with the exception of Germany, but France’s simultaneous reliance on tax increases and failure to effect labor-market reforms pushed S&P’s hand.

They’re valid complaints: The IMF projected back in June that France’s economy will only expand by 0.8% in 2014 (0.9% according to the French government’s projections), while French unemployment has hung near 10$ this year.

The storms are adding up to a volatile mix of a labour market in need of change, a business climate hindered by Francois Hollande’s goal of boosting budget shortfalls with taxation increases, and the European economy’s overall ongoing malaise. Investors beware.

Shaping up for a strong year

Despite France’s and Europe’s troubles, 2014 is looking like a good year for investors around the world. Don’t expect the kinds of gains we’ve seen from markets in 2013 – particularly if the U.S. taps the brakes on quantitative easing, as it must eventually.

However, falling American unemployment, a shift to sustainable long-term growth in China, and Japan’s surge should all contribute to the ongoing global recovery that has dug Wall Street and Main Street out of the fallout of the recession.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. This article was written by Dan Carroll and first published on fool.com. It has been edited for fool.sg.