By Mark Burgess, chief investment officer, Threadneedle
Investors head into 2013 knowing that few of the fundamental economic problems in the developed world have been solved – and many of them could remain unresolved throughout the year. However, as 2012 has shown, a situation which goes from worse to bad is one in which astute investors can make considerable amounts of money.
Looking to 2013, the overall environment is one of uncertainty although some of the risks that drove significant headwinds in 2012 – such as the Chinese leadership transition and a complete disintegration of the eurozone – are perhaps less concerning for markets than they were a year ago. Moreover, in the eurozone, there is now at least recognition that very tough decisions lie ahead. As a number of European politicians have indicated, they all know what to do to address the debt crisis, they just don’t know how to get re- elected if they do it. We have held a very cautious view of the global economic environment for some time, and events over the past year have proved our caution to be well founded. We continue to expect the economic outlook to remain challenging in 2013. The overhang of national debt will cast a very heavy shadow for an extended period, and for this reason we remain cautious on companies that are heavily reliant on government spending. On a more positive note, we believe there may be grounds for expecting some improvement in macro data in the near future. In the US, there have been a number of better than expected data releases recently. The housing market appears to be showing a useful recovery, even before any beneficial impact from the Federal Reserve’s third round of QE. While uncertainty over the presidential election has now been resolved with President Obama back in the White House, the fiscal cliff continues to cause concern and has led companies to postpone investment decisions. This remains a worry given the knock-on impact on job creation and economic activity. We expect more details of measures to tackle the fiscal cliff shortly, and this may release some pent-up demand in the more predictable environment that should follow. In any case, while politicians may be slow in coming to an agreement over the fiscal cliff, we believe it is very unlikely lawmakers will actively try to legislate another recession. Meanwhile, the news from China shows signs the economic slowdown has bottomed, a clear plus for equity markets and risk assets generally as the emerging world remains the primary motor of global economic growth. The latest official PMIs (Purchasing Managers’ Indices) in China have been above the crucial 50 level (the level that separates expansion from contraction), and the recent de- stocking phase appears to be largely over. In addition, the leadership transition is now in progress and some further policy stimulus could well be on the cards for 2013.
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