Diversification is key to navigating this year's biggest risks, writes James Klempster, portfolio manager at Momentum Global Investment Management
With almost two months of 2013 behind us already, it would appear the bulls are in the ascendancy. Looking back on last year, despite the regular bouts of investor anxiousness and risk aversion, reference to cold, hard data confirms a strong year for equity markets, with a sterling return of 10.6% for global equities in 2012.
While we remain optimistic on equities over the medium term, from a shorter term perspective we are concerned at how quickly the ‘great rotation’ has become the consensus theme for 2013.
The issue for fundamentally-driven investors is whether earnings growth has been sufficient to offset movements in stock prices, and this – combined with a risk of complacency following the strong market moves – is the issue making us a little more cautious presently. While the corporate sector is in good shape, many of the macro risks that fixated investors last year still remain, so a degree of circumspection may be warranted.
There may be trouble ahead
There is some justification for the buoyant mood: the US has averted the fiscal cliff (for now); the problems in the eurozone, while not solved, are considerably less pressing than a year ago; and the Chinese economy appears to be picking up after the clear slowdown witnessed during the second half of 2012.
The corporate sector is strong but economic growth remains elusive as deleveraging in the developed world keeps a lid on GDP. While systemic risks are certainly reduced, we expect plenty of bumps through 2013.
Looking forward, the biggest risks are political and policy related. The exceptionally easy monetary policy of all the major central banks will continue throughout 2013 and should provide a very strong underpinning for markets. Policy mistakes by central banks or governments would have a major bearing on markets; the scale of debt in the system is very high and any policy errors could be very damaging.
While moderately cautious with respect to equity markets over the short term, we continue to believe they are the long term driver of returns for multi-asset investors.
Areas of the equity markets we believe will provide solid returns this year include ‘quality’ equity, where preeminent franchises with high cash generation and excellent dividend cover should insulate investors from the worst of the markets’ swings.
In a similar vein, we are adding global listed infrastructure to appropriate portfolios due to the predictability of the cash flows from these core assets which, combined with revenue streams that are often inflation protected, makes these businesses attractive.
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