The strong performance in equity markets globally in the last six months of 2012 looks set to continue as we enter the New Year; global growth is recovering and Central Banks have demonstrated that they are committed to policies which will provide support for equity markets. We are positive about the year ahead and are building our portfolios around several key themes which we think best exploit the current market trends. Our themes include: recovering consumer confidence driving increased consumer expenditure; an improved appetite for risk assets among the investment community; and, technology as a driver of increased efficiency and a beneficiary of cash rich businesses.
In the US, a sharp fall in unemployment, rising house prices and low interest rates have led to an improvement in consumer sentiment which in turn has driven stock markets higher. The powerful US consumer base is largely responsible for the current market rally driving the share prices of building stocks and general retailers higher. The best performing stocks in the UK have also been driven by consumer expenditure and we continue to see evidence of higher consumer borrowing and job creation in the private sector, both of which will provide further fuel for the current spending spree.
Despite the relative merits of US and UK businesses, we are more excited by the prospect of strong returns in emerging market stock markets. The flows of money into equity funds ended the year on a strong note and net inflows into emerging market equity funds continued for the fifteenth week in a row. This clearly signals an increase in investors’ appetite for risk in their search for higher returns. But the emerging economies are attractive in their own right; they are not carrying the same debt burden as many developed markets, they are growing at a much faster rate and their equity markets have underperformed the US, UK and even European stock markets in the last few years. Potentially the most exciting news is the improving economic data coming out of China which suggests there will be a resurgence in exports. This has significant positive implications for the US, Brazil and Continental Europe, all of which are important trading partners with China. We believe the soft landing in China is already underway and that the new Government will provide further stimulus in due course through additional monetary easing and investment in infrastructure.
The recent positive economic data from China perhaps contributed to the better performance of the Brazilian stock market in the last quarter of 2012. Brazil has disappointed for several years but we are starting to look at increasing our exposure to investments in South America as we believe that conditions are improving. Exports fell due to a combination of the debt crisis in Continental Europe, the slow down in China and the Government’s interference in business affairs which hampered growth and unnerved foreign investors. However, these negatives are starting to unwind and together with attractive valuations and a better appetite for investments in equity markets, we think the stock markets in Latin America will be pushed higher in 2013.
Our final theme is technology which we think is integral to increased global productivity. 2013 will be all about the proliferation of applications and increased efficiency and we think businesses will invest some of their cash in new software and operating systems. The balance sheets of blue chip businesses are stronger today than they have been at any point in the last decade and they are coming under pressure to ’invest’ or ’divest’. Semi conductor manufacturers look interesting as we enter 2013; their share prices have underperformed latterly because their success is so closely linked to global growth and their core markets have been weak. However, the improvement in global economic data should soon translate into an increase in demand for semi conductor chips.
Overall, we believe conditions are conducive to strong equity market returns in 2013. There is a lot of money looking for higher earning investments which could be a catalyst for better stock market returns so, despite the numerous headwinds which may lead to some short term volatility, we think that long term investors will enjoy a good run. While valuations are attractive and as long as there remains a healthy amount of investor nervousness and negative sentiment in the media, we will have a positive outlook.
We wish you a Happy New Year.