Looking Back, Looking Forward

At the start of the New Year it is worth reviewing how the last 12 months has fared for investors as well as looking forward to 2013.

Global markets have rallied in the second half of 2012; financial stocks in particular had a positively balmy year. In July the President of the European Central Bank, Mario Draghi promised to do whatever it takes to prevent the EuroZone from collapse, cheering investors whilst signs of economic recovery in China helped allay fears of a hard landing. On the downside at the date of writing on 30 December the US economy faces falling over the so called fiscal cliff of tax rises and spending cuts, which could send the US and global economy into a tailspin. In addition the underlying economic problems of low growth, high unemployment and government indebtedness in the EuroZone remains deep rooted. Stockmarkets becalmed in the second half of 2012 could be get nervous and volatile again in 2013 as these issues re-surface. Something about the second quarter concerns me, the old adage of “sell in May and go away,” could apply.

Equity prices have also been driven by a cocktail of practical realities for investors – interest rates on cash are low and are set to remain low with Government and central bank policy despite missing  inflation targets. For cautious income investors inflation means holding too much cash is no longer an option but the alternative of buying supposedly “safe” gilts runs a risk. They are in bubble territory and yield diddly squat, so the search for income means money is flowing into equities and corporate bonds despite the extra risk. In contrast the deleveraged and cash rich corporate sector is not investing its cash piles given the backdrop of economic uncertainty and risk. Perversely this has proved good for dividends as some of this cash is being returned to investors. Equity income is back in town, this time with a focus on overseas markets of Asia and the US.

So with this backdrop what are my investment ideas? Equities are my favoured core asset class for 2013 given the health of the corporate sector although I expect more volatility in prices. Active fund management and good stock selection remains by far my favoured investment strategy especially where stockmarket indices are going sideways. Passive tracking may be cheaper but it yields poor returns in these circumstances. Global equity income, index linked bonds and commodities are favoured sectors of mine. The latter are highly economically sensitive and had a bad 2012 but I think the global economy and China may recover faster than many expect in the next 12 months. If so a spike in inflation could result and hence index linked strategies are included in my buy list.

To hedge the risk that this analysis is over optimistic and off the wall or for cautious investors once again I advise using regular savings plans. Although I risk boring you with this message the best things are worth repeating, as I frequently tell my son with my jokes!

To close it is interesting to consider performance of selected IMA sectors in 2012. Data from Trustnet (at 28/12/12) show the following total returns for the average fund in the relevant sector:

UK All Companies – 15.8% – a decent return, always a good core holding for UK investor portfolios

UK Equity Income – 14.7% – the value of dividends has possibly not been priced into equities

Global Equity Income – 11.5% – as above

North America – 9.1% – a surprising laggard given signs of clear economic recovery in the US in 2012 including falling unemployment and stabilisation of house prices

Europe (excluding UK) – 20.3% – a natural beneficiary of greater confidence in the EuroZone

China/ Greater China – 14% – surprisingly good for a poorly performing equity market in recent years

Global Emerging Markets – 13.9% – remain coupled to the fortunes of Europe and US which fall in “risk off” markets

UK Smaller Companies – 22.9% – a stockpicker’s world of under researched and mispriced gems

North America Smaller Companies – 8.9% – excellent value and potential here with this domestically focused sector. You will recall 70% of the US economy is the consumer and this sector will be a major beneficiary if and when confidence and spending improves.

Not unsurprisingly the worst performing funds were those that invest in commodities, oil and gold equities with negative returns. These do not have a dedicated sector and are typically located in the IMA Specialist sector, a ragbag mix of unrelated funds. For example the widely held JP Morgan Natural Resources fund fell 12% in the year to 28/12/12, an improvement from the summer where the 12 month figure was in excess of -30%!

In conclusion 2013 is set to be another interesting year for investors and their advisers.  However having feared a stockmarket crash more than a year ago I can’t dodge the question of whether I think it will happen this year. I still think there is a good chance of such. As noted above there are clear pressures in the financial system and global economy that could surface – the US going back into recession, the inability of EuroZone governments to finance their debt, a further banking crisis from bad debts and the bubble in government bonds. Any of these could send equities into a tailspin. A crash offers those sitting on investment cash an opportunity to buy tactically into equities at low prices, a benefit on recovery and an early one if it is V shaped. Further a crash is not necessarily a disaster unless you happen to be crystallising a portfolio or pension at the wrong time. For example the FTSE 100 finished higher in 1987 despite the famous October crash.

As usual you should seek individual advice before making investment decisions.