Andrew Cole, investment director, multi-asset group at Baring Asset Management, looks at the likely headwinds and opportunities for multi-asset investors in 2013
Multi-asset strategies continue to prove themselves in the face of on-going global economic uncertainty. A multi-asset investment approach aims to produce equity-like returns but with less risk. Investing in a range of equities, bonds and alternatives allows the fund to quickly adapt to changing economic scenarios and market conditions. In essence, these types of strategies are a good fit in volatile markets.
As we head into 2013, we continue to see a number of challenges for investors. The most obvious of these, and with the widest implications for risk assets, is the fast approaching US fiscal cliff. Here, the US politicians have to negotiate on a twin package of unpopular fiscal measures. Failure to agree to a package of spending cuts would throw the world’s biggest economy back into recession.
However, as things stand, it looks like negotiations are advancing along constructive lines and, fiscal cliff issues to one side, we see the US economy in better shape than any other major developed economy. Exports are competitive, the banking sector is recovering and expanding its balance sheet and lending more and consumers are generally upping their confidence about the future.
What lies ahead for multi-asset?
The year ahead
Yet, aside from a recovering US, what else is set to appear on the horizon in 2013? Economic growth predictions for 2013 from the International Monetary Fund in October show potentially contrasting fortunes for the biggest economies. While the US is expected to grow by 2.1% and China by around 8.2%, the outlook for Europe is more sombre. In fact, the European economy ex-UK is barely expected to grow at all, just 0.2% forecast over the year. The UK economy itself will do slightly better, growing by 1.1%.
Politics continues to dominate economics in Europe. For us, the big worry is that growth is largely absent and an outright recession for next year is a very likely scenario. Positives in the region include the European Central Bank’s bond buying programme. Yet, as we have stressed on many occasions this year, the underlying economic trends of austerity combined with a lack of competitiveness are remorseless. We believe this will continue to be the case next year.
Turning to China, there seems to be a clearer picture than the one facing investors in 2012 although growth may still be below what we have become accustomed to. The Chinese economy has been weaker than the consensus expected this year but the authorities have acted, and there are now tentative signs that it has achieved a landing. We may yet see growth accelerate towards what has been perceived to be the trend growth rate in 2013.
The new party leadership may direct more positive sentiment toward the market in the months ahead as they announce further initiatives. The administration does face challenges, however, as it seeks to rebalance the economy away from exports and investment, towards more domestically-focused production and consumption. This rebalancing, in our view, could result in a lower trend rate of growth, and leave the economy more vulnerable to inflation.
For now, news that the economic growth rate has stopped slowing could do much to boost sentiment towards those areas that have performed poorly, in our opinion. This could be supportive not just for China, but other emerging markets too.
Where are the opportunities?
Investors have sought safety in the growth on offer in the US through 2012, particularly given events elsewhere. This, however, is now firmly embedded in the majority of analysts’ expectations and valuations are at the higher end of the range.
In the multi-asset portfolios we run, we have been seeking opportunities elsewhere, in more generally out-of-favour emerging markets and more defensive UK equities. From where we stand, the UK market, given its make-up, has significant exposure to global growth akin to the US but at more attractive valuations.
At a sector level, we think next year may be a better one for financials, supported by low valuations. In the US, the outlook for banks’ profitability is gradually improving and they are generally expanding their balance sheets. We generally remain less warm on utilities and consumer staples, favouring consumer discretionary and healthcare instead.
Looking at fixed income, we are generally positive on corporate bonds and here we prefer high yield over investment grade. In our view, high yield continues to be an attractive asset class, with encouraging attributes like low default rates and healthy corporate balance sheets helping to support this view.
The perceived “safe-haven” status of US, UK and Australian government bonds has pushed yields to historic lows. In the light of Europe’s sovereign debt crisis, we expect some investors to continue to favour these assets. For us, however, we see little value in adding these areas of the market now, based on what we see as only a small chance of appreciation in 2013.
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