Caspar Rock, chief investment officer at Architas, reveals the fashionable assets to avoid this year and some that may become more popular.
Keeping up with the trends in investment is a full-time job. Here are my predictions for what’s hot and what’s not in the coming year.
What not to wear
We will be steering clear of gold. Not only has it been driven higher during the party season of quantitative easing (QE), it offers no yield to investors. We believe better protection against inflation can be found in certain equities and inflation-linked bonds.
The best thing that can be said about gold is: ‘OMG, shiny’. There is an old City maxim that an ounce of gold should be able to buy you a tailor-made suit but, at current prices, it could buy you a couple of them and still leave money left over for a good lunch. Gold currently looks overvalued and vulnerable to a turn south as the effects of QE wear off.
Architas' Caspar Rock on the assets to avoid this year
With inflation stubbornly above the 2% target and the risk of it rising in the medium term, we seek other forms of inflation protection. Long-dated government bonds are the near antithesis of inflation protection: they are currently offering a negative real yield (after inflation) and are not risk-free. We shall be avoiding long gilts until there are clear signs of a pickup in the global economy, which would see yields rise to a more normal level.
Quality stocks have seen a considerable rally recently, as stability in their underlying earnings have allowed for progressive dividend growth. Although we feel that they should form the bedrock of a portfolio, after the strong relative performance of these stocks over the last year or so, we believe a change of style may be due and that more cyclical – and value-oriented – stocks could stand out next year.
Last year was marked by substantial underperformance of Japanese stocks. But even the most spurned fashions can have their day: a rally towards the end of the year was no doubt driven, at least in part, by optimism surrounding the recent election.
As the new administration aims to increase QE and print money to help exporters, the yen should continue to show weakness in 2013. We are avoiding the currency and have switched a substantial proportion of our Japanese equity exposure into hedged share classes.
While the effects of the new stamp duty regime are not fully known, anecdotal evidence is that UK property sale volumes are sharply down. Furthermore, with banks continuing to deleverage, and refinancing costs remaining high, the marginal buyer of property is hard to find. Adding to this is continuing pressure on the UK high street amid the rise of online shopping and its detrimental impact on commercial property.
What to consider wearing
A key accessory for 2013 should continue to be yield – in all forms. As mentioned, inflation remains uncomfortably above its target and interest rates are set to remain at their low of 0.5% for a while to come. This means savers are incrementally turning to riskier investments in pursuit of inflation-beating returns. What’s more, as the population ages, more and more people are seeking income from their investments.
Investment grade bonds are going to complement any outfit in the months to come. High yield has rallied strongly of late and is perhaps unlikely to give the same return in 2013. Investment grade, on the other hand, remains attractive on a relative and absolute basis. We believe current price levels over-discount the risk of default, as the underlying balance sheets are pretty strong. A contraction in spreads in 2013 seems likely.
Less liquid assets should not be overlooked. Since the global financial crisis in 2008, there has been a focus on liquidity as economic uncertainty has led many investors to prefer easy access to their money.
However, illiquid assets (including private equity, infrastructure, structured finance and forestry) can offer attractive yields and potentially longer-term capital growth if you are prepared to be patient.
Emerging markets offer good long-term return potential for the less risk-averse investor. For the year ahead, we see particularly attractive returns for the contrarian emerging market investor who bucks the trend and sets their own style: India, Brazil and China spring to mind. In 2012, India was the catwalk star, rising nearly 30% over the year.
Brazil, on the other hand, underperformed sharply during the year, but could be due a rebound next year. In particular, as the country gears up for the 2016 Olympics, infrastructure and social improvements should be of benefit.
For most of 2012, the Chinese slowdown has been causing anxiety amid fears of a possible ‘hard landing’. The appointment of new leadership has given greater visibility to the economic policies for the medium term.
The fashion police should be able to stand down in 2013 if these golden rules are followed.
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