According to American philosopher George Santayana, those who cannot remember the past are condemned to repeat it and indeed no outlook for 2013 can be accurately forecast without some reflection on 2012.
The year began reasonably well with share markets rallying in the March quarter and economic data giving cause for optimism.
The European Central Bank injected even more liquidity into the European banking system. In Greece, further austerity measures, combined with a ‘voluntary’ restructuring of some privately held Greek sovereign debt.
However, as MLC Investment Management investment strategist Brian Parker notes, the June quarter proved much tougher, with both Australian and global share markets losing a good deal of ground.
“It became clear that Europe’s issues were far from resolved. Two attempts to form a workable Greek government finally resulted in a coalition that agreed to implement austerity plans,” he wrote.
“In the US, the economic news took a turn for the worse and the Federal Reserve engaged in another round of quantitative easing. Meanwhile, the ECB president, Mario Draghi, announced his intention to buy the bonds issued by any of the troubled eurozone governments in unlimited amounts.”
Hanging off the fiscal cliff?
In the wake of President Barack Obama’s re-election, attention quickly turned to fiscal policy, and efforts to avoid the so-called fiscal cliff. The world now faces the risk of a renewed US recession; compromise and common sense are sorely needed, Parker continued.
“In this environment, investors have searched desperately for decent yields. Listed real estate, higher dividend-paying stocks and corporate bonds – especially high yield bonds – have been the beneficiaries. In a world that is short of AAA-rated sovereign bonds with anything like a decent yield, Australian government bonds, and hence the Australian dollar, have been highly sought after.”
For Parker the Australian economy remains something of a mixed bag and the outlook uncertain.
“While there remains a good deal of mining-related investment activity, a number of project cancellations and postponements together with an uncertain global outlook have cast doubt over the future strength of mining investment.
“[The number of] consumers are growing, their spending and confidence levels are improving. Indicators of housing activity are starting to respond to lower interest rate, albeit tentatively. However, business surveys have been more subdued and the labour market has weakened somewhat.”
Come a long way
Philip Kewin, general manager of retail life risk and investments at Zurich, says a number of insights can be gleaned from what he called a challenging year.
“Among the many highlights that took place around the world in 2012, there is one event that has really stayed in my mind that I believe will help shape the way I think about things in 2013, and that is the US presidential election,” he said.
“But even this tremendous campaign process was completely overshadowed by the swift devastation caused by Hurricane Sandy, which swept through the East Coast. Both parties cancelled events to focus on what was truly the priority – and that was the health and safety of a nation.”
Kewin believes the industry can take a simple lesson from the response.
“Our customers have to be our priority. And if we focus on helping them, no matter what lies ahead in 2013, we will continue to succeed. In fact, you may not realise it amid all of the discussions around regulatory change and talk of ‘getting FoFA ready’, but we have in fact come a long way in 2012 already.”
In particular, he cites rapid developments across the industry in use of technology to boost efficiency, enhance profile and to further engage with clients.
“There has been a big focus on practice management and efficiency,” said Kewin. “Many of you have already worked hard on firming up your value proposition so you can have meaningful discussions with your clients about what you can do for them – how you can add value and help them achieve their financial goals.”
For many financial planners half the battle is coaxing investors scarred by uncertainty and volatility back into financial markets.
Long-term growth not fully appreciated
According to Hyperion Asset Management’s managing director, Tim Samway, a new trend is shifting away from cash and other non-growth assets as investors seek both good returns and preservation of capital.
Speaking to advisers at a series of luncheon presentations around the country in December, Samway warned that some investors are likely to still be distracted by short-termism.
“When investors are in ‘fear’ territory, they tend to stay overweight in cash,” he said. “However, as investors seek more volatile asset classes, like equities, they must look for the quality stocks.
The key, he says, is to focus on the less mature companies, which offer better growth in earnings.
By way of example, Samway cites companies such as, SEEK, REA, Carsales.com, Trade Me and Domino’s Pizza.
“Around 25 per cent of Hyperion’s portfolio is invested in companies that are exploiting the secular transfer of sales from traditional forms to online. Their valuations are above market, but we think that the drivers of their long-term growth have not been fully appreciated by the market,” he said.
Re-rating and six themes for this year
Dominic Rossi, global chief investment officer of equities at Fidelity, predicts that 2013 will be another challenging and event-driven year for equity investors to negotiate.
“While the prospects for earnings growth in most developed equity markets are now more modest, a positive case can be made for a re-rating of equities, yet this is dependent on progress being made against some powerful headwinds,” he said.
“With major government bond yields likely to stay low and below inflation, investors will continue to seek positive real returns in higher yielding, income-generating assets, and dividend-paying equities remain attractive on a total return basis.”
Russell Investments’ Global Outlook identifies six themes to watch for 2013:
1. US market: addressing long-term issues at last?
2. Eurozone: finding the right policy mix
3. Global equities: a rising tide may not lift all boats equally
4. Emerging markets: due for outperformance
5. Global currency outlook: more of the same, but risks aplenty
6. Commodities: it’s not just about monetary policy.
