Investment Week 17-12-2012

2012 draws to a close with many of the issues that have haunted markets appearing to be moving towards some kind of resolution. The European crisis may be rumbling on, with only minor progress made to a lasting solution to the debt problem, but ECB president Mario Draghi’s promise to “do whatever it takes” has reassured markets the political will exists to preserve the eurozone.

Policymakers in the US look set to go to the wire over the fiscal cliff but at least growth has picked up, the country’s housing market appears to be recovering and the election is decided. Meanwhile China no longer seems likely to see a hard landing. By the end of 2012 growth appeared to be picking up and a recent Bank of America survey found two-thirds of money managers predicting China’s economy would grow at a faster rate next year – the highest reading since the survey data started in 2003.

This expanding global growth should in theory create a benign backdrop for corporate profits in 2013. Companies continue to be lean, with many having grown profits in defiance of the economic backdrop. Markets should be looking at a bumper 2013 although there are a number of considerations that should temper this view.

Markets have moved up significantly in 2012 – notably in sectors such as smaller companies and cyclical areas like Europe. Investors no longer have the reassurance of super-low valuations they had at the start of 2012. By definition, the point of maximum pessimism has passed. Of course, markets can still make progress, but they are unlikely to repeat the double-digit returns of the past 12 months.

Equally, there are still some potential banana skins lying in wait for investors – for example, Chinese growth may be expanding, but its relations with the outside world are deteriorating. China and Japan are engaged in a worrying dispute over the ownership of uninhabited islands in the East China Sea. Gideon Rachman in the Financial Times has described this as a “frightening pointer to the future – all the more so since America has made it clear that the islands are covered by the US-Japan security treaty”.

The Middle Eastern situation, notably the war in Syria and the victory of the Muslim Brotherhood in Egypt, could also prove disruptive for markets in 2013 – for example, any knock-on effect on the oil price could temper global growth expectations.

As we head into 2013, the picture undoubtedly looks better than at the start of 2012, but that has been largely reflected in markets. The backdrop supports another year of growth in equity markets but some caution is warranted.

DECEMBER 2012

 Important Note: Material within this article has been complied with the help of the Marketing Hub which is part of Marketing In Practice Ltd on behalf of your professional financial adviser. The contents of this document do not constitute advice and should not be taken as a recommendation to purchase or invest in any financial product. The value of a market investment can go down as well as up and you may not get back the full amount, particularly in the short term. Before taking any decisions, we suggest you seek advice from a chartered financial planner.

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