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What investors can look forward to in 2013
In the last Lolly Investor Programme of the year Gavin Lumsden explains why he's feeling positive about prospects for 2013.
by Gavin Lumsden on Dec 20, 2012 at 12:45
For my last Lolly Investor Programme of the year I popped down the road to the place where the new US Embassy is to be built, to discuss the year ahead.
Despite the obvious challenges to the global economy, there is reason to hope that 2013 could be another good year for investors.
The Lolly Investor Programme is a weekly series of videos for people who are new to investing. To see the earlier videos go to the Lolly Investor Programme page.
This is the last video of the year
Hello and welcome to The Lolly Investor Programme. As this is the last programme of the year I thought it was time I had a look at what investors can expect in 2013.
I’ve come to Nine Elms Road, which is south of the river Thames in London, which is where the new US Embassy is going to be built.
Why have I come here? Well I think this building site represents what we can and cannot know about the year ahead.
Right now in December 2012 it’s clear the US holds the key for the short-term direction of stock markets. President Obama and his Republican counterpart John Boehner are locked in urgent budget talks to try and avoid the US economy falling over the so-called ‘fiscal cliff’.
Just like the architects who’ve designed the flashy new embassy building, we know what we want to see from US politicians. The question is will we get it?
But before we look ahead let’s look back at 2012.
It was an amazingly strong year, turning out much better than could have been expected twelve months ago.
Back then investors were worried about three things.
First, was the potential break-up of the euro;
Second, was the slowdown in China combined with a change in leadership of its Communist party.
And third was the looming fiscal cliff threat in the US.
Fiscal cliff by the way is the term used to describe the $600 billion of tax rises and spending cuts, which if not repealed, could tip the world’s largest economy into recession in the New Year.
Of these three big risks the big fear factor in 2012 was the eurozone debt crisis. It caused stock markets to plunge in the early summer.
However, after Mario Draghi, president of the European Central Bank, promised to do ‘whatever it takes’ to save the single currency, most markets recovered and closed the year with high single digit or even double digit gains.
It was the same for most bond markets and gold too.
Although the three risks of the euro, China and the US remain with us, most experts agree that we’re probably past the worst.
The big risk they say is not to be positioned for the economic growth that we may start to see in 2013.
So with this in mind here is my quick canter through the reasons to be positive about the main investment markets.
Let’s start with the US.
Most experts believe the US will not be stupid enough to allow itself to fall back into a bad recession. Some form of political compromise on the fiscal cliff is likely.
This won’t be enough to stop the US economy taking a step back in the first half but after that the continued recovery in the US housing market and the energy boom provided by cheap shale gas should push the US stock market higher.
No one really knows what goes on inside the world’s second largest economy.
However, the general consensus of opinion is that China is managing to avoid the ‘hard landing’ from the inevitable slow down after years of breakneck development.
Also there is optimism that the country’s new leadership will manage to steer the economy towards a more sustainable consumer-led model.
If this happens it will be good news for China and its neighbours in the Asia Pacific.
It’s not easy to be too optimistic about Japan as the country has been stuck in deflation for years.
However, it’s possible the new government led by Shinzo Abe will pressure the Bank of Japan to take bigger steps to drive down the value of its currency, the yen. A weaker yen would help the country’s exporters and could boost the country’s depressed stock market.
Europe remains mired in recession as a result of the sovereign debt crisis.
There’s no hope of a quick economic recovery. And with general elections in Italy and Germany next year there are huge political risks remaining.
However, the positive thing for investors is that the shares of good companies are trading cheaply as a result of the crisis. This is a good time for long-term investors to buy in.
It’s a similar story in the UK. The UK could lose its top triple A credit rating next year as the economy struggles with the austerity agenda of the coalition government. This could be bad news for investors in gilts, or UK government bonds.
But the good news for investors in shares, is that companies in the FTSE All Share are looking pretty good value at the moment.
The challenge in 2103 for share investors will be to avoid companies whose earnings are going to be hit by the recession and then when to move from defensive stocks to more economically sensitive ‘cyclical’ stocks when, and if, economic growth starts to show.
Debate rages as to whether there is a ‘bubble’ in bonds.
However, there is no doubt that the government bonds from the UK, US and Germany look very expensive as a result of central banks buying the bonds in order to keep interest rates low and investors flocking to them as a safe haven in troubled times.
These government bonds no longer look safe. Elsewhere in the bond market, emerging market bonds, corporate bonds and high yield bonds, these areas have have shot up in value in recent years and now require a skilled investor to find good value.
To conclude, it looks like 2013 will be another volatile year for investors, particularly in the first half of the year.
But do not confuse volatility with pessimism. As I said, there are plenty of reasons to be optimistic about markets, particularly for investors in shares rather than bonds.
All it leaves me to do now is to wish you a Happy and Prosperous New Year and thank you for watching.
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by Gavin Lumsden on Jun 14, 2013 at 16:18