Credit Suisse Outlook for 2013: Pessimism Is Subsiding
Anja Hochberg, Head of Investment Strategy, Asset Management Credit Suisse
The year ends with political stabilization and a strengthening of the economy. Next year we are likely to see a continuation of this trend, although challenges remain. How can investors successfully balance opportunities and risks?
The outlook for the economy and financial markets in 2013 is likely to comprise a continuation of the past year in many respects. Sovereign debt remains the focal point, both politically and economically. Nevertheless, the debate will not be confined to Europe. First, Europe has made major progress this year in terms of debt reduction, structural adjustment, and devising a European blueprint for the longer term. Second, the debate surrounding the so-called US fiscal cliff is likely to set the tone for the financial markets — particularly at the start of the year. China will also be watched more closely against the backdrop of a changing of the political guard. A major change of political direction is unlikely, however. Owing to the tense situation in both the Middle East and the Far East, we can expect the geopolitical risks to be similar to those of 2012.
Worst Is Over for the Economy
The EU economy remains on the back foot at the moment, despite the progress made at a political level. Germany will once again be the engine of growth thanks to private consumption, while the peripheral countries will in most cases show negative growth rates. In overall terms, however, the euro zone is likely to make a mildly positive contribution to global growth. Compared with 2012, which was mostly characterized by the strength of private consumption — particularly in the US — a hitherto reluctant industrial sector is likely to make a more significant contribution in global terms during 2013. This is likely to provide additional stability for the economic upturn. Another increased growth contribution from the emerging-market countries is likely to be similarly supportive. Following its deliberate growth slowdown, China has moved to a sustainable medium-term growth trajectory and in economic terms too is likely to be a bigger influence again — not only within the region but also beyond it. We expect international central banks to continue acting in an extremely generous manner — and that includes using unconventional means.
Potential for the Swiss Economy
The Swiss Purchasing Managers Index remains below the 50-percent growth threshold. However, a brighter global picture is likely to result in a noticeable economic acceleration in Switzerland too next year. Besides rising exports, the ongoing strength of private consumption as well as a pick-up in investment are likely to constitute the cornerstones of Swiss economic activity in 2013. Despite a visible increase in growth rates, the Swiss National Bank is likely to maintain its policy of low interest rates as well as defend the Swiss franc’s floor against the euro.
Medium-Term Threat of Inflation
The global economic bottoming-out process and longer-term return to higher rates of capacity utilization are likely to be accompanied by a build-up of cyclical inflationary pressures in the long run. In view of the moderate pace of growth, there is no need to worry about a major burst of inflation in the near term — assuming moderate oil prices. But against the backdrop of latent structural inflationary pressures that are difficult to predict, we are already turning our attention increasingly to real investments.
Strategic Investment and Tactical Plays
Real investments constitute a cornerstone of our investment strategy. They include not only alternative instruments such as commodities, gold, and real estate, but also equities in particular. The economic headway that has been made, generous provision of liquidity by central banks, persistently attractive or fair valuation of riskier investments, coupled with ongoing pressure to invest, should get the financial markets pendulum swinging back again toward opportunities. We therefore recommend beginning the new year with an overweight in the equities sector. In asset management terms, our current focus is on tactical plays in Europe and now increasingly China again too.
Diversification Still the Order of the Day
Despite a moderately optimistic outlook for the year ahead, a number of major challenges remain. First, we should not expect a one-way street in terms of financial market technicals — as was the case in 2012. Thus a well-diversified, balanced portfolio is not just a theoretical truism but essential to our investment strategy. Second, some asset classes exhibit specific requirements. For institutional and private investors alike, the continued environment of low interest rates represents one of the biggest challenges. We therefore begin the new year with an underweight in fixed-income securities and a cautious maturity strategy. Corporate bonds remain our focal point, even if we are already seeing higher valuations here in some segments. Emerging market bonds should also be included in the portfolio on a well-diversified basis in the event of increasingly attractive local currencies.
Growing Allure of Gold
In relation to equities, particular significance should be assigned to the sharpening of the regional allocation next year. As for alternative investments, the aim will once again be to achieve the right mix between these heterogeneous investments. The brighter economic outlook is also likely to increase the attractions of cyclical commodities in the medium term. But with demand for physical commodities not yet back in full swing, one of the key drivers of investment remains absent. We are reiterating our positive view on gold, however. As well as price-supportive factors such as expectations of higher inflation, geopolitical risk, low interest rates, and a weaker dollar, the prospect of further balance sheet expansion by the central banks has once again increased the strategic relevance of the yellow metal.
Despite the improved outlook, neither economic nor political normality has been restored. Investors should address these challenges through an active mix of strategic investments and tactical plays, and by proceeding on a countercyclical basis.
Heffernan Capital Management
Business Development Director – Private Client Group,
3 Raffles Place #07-01
Bharat Building Singapore 048617
Tel: +65 6329 6408
Fax: +65 6329 9699
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