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Investment Bulletin - My Views For 2013

21-January-2013
21-January-2013 6:49
in General
by Admin

 

What a year 2012 has been. It has not been an easy year and with the Christmas & New Year break, life has been put back into perspective and some sanity has returned. 2012 has ultimately been a good year for my clients and despite the challenges, we have made good gains. The challenges that faced the markets have been considerable:-
 
  • Disappointing economic growth and corporate earnings
  • US Presidential Election won comfortably by Barak Obama
  • Worrying geo-political developments, such as, in the Middle East and China
  • The ongoing debt crisis in the Eurozone (at times threatening the very existence of the Eurozone)
  • Easing political risk in Europe but still minimal Eurozone growth
  • Consumer confidence growing in the US
  • Relatively successful Chinese growth expected in 2013

Looking ahead, we’re beginning to see signs that a more positive outlook is developing. In the US, in particular, the recovery we see in the housing market could have a meaningful impact on growth prospects. Does this mean that the 30-year bull market in bonds is coming to an end? And should we be braced for an imminent increase in interest rates, reminiscent of the US Federal Reserve’s 2.5% worth of hikes that clobbered bond markets in 1994? I don’t think so. The Fed has said that it won’t raise rates until 2015 and while it could do so earlier, I think that next year would almost certainly be far too soon.

The outlook for returns in 2013 will depend on where you invest, I am confident that there are still attractive investment opportunities in several areas of the investment universe. In these conditions, a flexible approach and experienced active management can really prove their worth.

Markets will worry about the Italian elections in 2013 (likely to be brought forward thanks to PM Monti’s resignation) and in Germany (likely in September 2013) and even about the stability of the coalition government in the UK.

Currently, the most likely outcomes seem to be a strong vote for Merkel and her CDU/CSU grouping in Germany and the election in Italy of a coalition with a strong commitment to the Euro but a rather weaker commitment to structural reform of the economy. 

Worries about the possibility of a hard economic landing in China in 2012 abated with a soft landing and expected growth should be robust in 2013. Although Obama’s re-election does not solve the issue of political gridlock within the polarised system in Washington, growing consumer confidence underpins hopes that the US economy is on the mend.

Above all, markets still take heart from the extraordinary support offered by central banks across the developed world, with ultra-loose policy keeping interest rates and bond yields low, providing liquidity for the financial system and helping governments finance budget deficits cheaply. There may yet be worrying consequences from this grand monetary experiment, but for now investors should think twice about betting against the tide of central bank Dollars, Pounds, and perhaps increasingly Euros and Yen that are expected to keep flooding the world economy.

Will 2013 be the year in which the world really starts to emerge from the shadow of the global financial crisis? Perhaps that is too much to hope for, but there are good signs that the healing process in the global economy and markets can continue. Growth in the major developed economies is likely to remain quite subdued – slightly more robust in the USA, but still close to zero in the Eurozone.

 

The Economy 

Economic developments around the world now range from tangibly-improved in the United States, through apparently-improved in China and India, to less-bad in Europe. A return to financial markets driven by fundamentals is long overdue but first we need to consider the political ramifications of 2012 and prospects for 2013 :-

  • Risks from the Middle East are higher
    •   displacement of US influence in Egypt by the Muslim Brotherhood
    •   civil war in Syria
    •   this clearly fragile balance of power leaves the region less stable than a year ago
    Elections were a feature of 2012
    •   two in Greece
    •   France (with the arrival of a wave of socialism, which already appears to be on the wane)
    •   Barrack Obama's re-election in the US
    •   Re-election of Shinzo Abe in Japan.
  • Risks from the Eurozone are lower and falling
    •   It appears very likely that Angela Merkel will be re-elected in Germany
    •   The Italian election, which must be held by April 2013, will determine whether the reform process Mario Monti was able to begin during his tenure continues or whether it reverses
  • The time for forgiveness is late 2013
    •   The German election will likely coincide with Greece’s return to primary surplus. 
    •   This could mean that Greece’s debt could only be forgiven if it defaults, and thereafter no more fiscal transfers would be possible. The appeal for the creditor countries is that it reduces the risk of political extremists gaining power and forcing the long-feared Grexit – an event which carries unquantifiable risk to the broader financial system.
  • Will profits matter more than politics?In the UK, general share capital growth is expected to be positive, combined with attractive potential dividendsIn the US, stronger earnings growth but a lower yield and a slight softening of the dollar will mean a more sedate return in sterling terms.European companies seem well placed to capitalise on the region’s export performance. The modest valuation of European shares offers an attractive yield, and positive trade dynamics are supportive of further gains.
    •   The chances of markets being driven by fundamentals, rather than politics, are clearly higher for 2013 than they were for 2012.
    •   I expect equities to trade according to their earnings growth.

  • Japanese equities are currently heavily overbought and I expect profit taking might be in order. With the country back in recession, I expect modest total return from Japanese shares.
  • The rest of Asia, however, looks set to enjoy robust earnings growth which encourages me to think positively about the potential for strong equity returns.

 

Investors must clearly treat these opinions with caution, as equities are volatile. I am an advocate of asset combining to take advantage of the differing asset performance related correlations, helping to manage both risk and volatility. I believe, however, that the potential for markets to reflect fundamentally attractive valuations should give investors optimism about the prospects for 2013.

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