It’s around this time of year that fund managers are asked to offer their predictions for the year ahead. A quick glance, however, at the forecasts from the various respected investors, economists and market commentators usually shows a wide spread of responses.
We’re not in the business of making wild predictions; rather, we subscribe to the theory of French writer and politician Alphonse de Lamartine, that “experience is the only prophecy of wise men”.
What we can say is that we believe the world is in for more of the same in 2013. Debt will remain a key feature of Western economies. Delevering of government, bank and personal balance sheets will continue, especially in Europe and the UK. This will keep investors hostage to the political whims of European leaders.
The search for growth, meanwhile, will remain elusive in Western economies and Japan. This, in turn, will restrain Asian and emerging economies that are dependent on global growth for their exports.
And although the US economy appears to be recovering quite nicely, led by improvements in the housing market, there is a significant risk that lower government spending and higher taxes in 2013 will keep growth on a tight leash.
China, meanwhile, remains the ultimate provider of mixed signals. Having seen its economic growth rate slow for seven consecutive quarters, there are hints that activity is bottoming out and ready to accelerate again in 2013. But it is questionable how the newly installed leadership of the Communist Party will address the imbalances and challenges in the Chinese economy.
With all this in mind, it is highly likely that monetary policy will remain extremely loose worldwide. Quantitative easing and ultra-low interest rates will continue. In addition, the pressure from the general public and business leaders will remain on politicians to promote growth policies over austerity.
In this environment, we expect equities to perform well in 2013, as they did in 2012. Despite decent returns in 2012, valuations are still reasonable, especially in the UK, Asia and Europe. In fixed income markets, our favoured area is investment grade corporate bonds. This higher-quality end of the corporate bond spectrum offers reasonable returns relative to government bonds, where the absolute level of yields is extremely low.
Our “more of the same” outlook reflects the slow-motion nature of the world in which we live – low interest rates, slow growth and chipping away at debt levels. If at the end of 2013, however, we find that market returns have matched those of 2012, we think that would be a decent outcome.
• Steve Kenny is head of retail sales at Kames Capital