Where to Invest in 2013 Market Predictions

Where to Invest in 2013 - Market Predictions, Outlook and our views on the coming 12 months.  (by Joanne Roberts, January 2013).

Government Bonds/Gilts
Equity markets were volatile throughout 2012, meaning investors moving to safe havens and Government bonds/gilts (including index linked stocks) trading at record highs.  Interest rates have remained low and yields on bonds are also low.  Now is not the time to buy into Government bonds/gilts because they are expensive and there is a threat to the UK’s AAA credit rating because of continuing recession and low growth.  If the credit rating is downgraded then it is possible that the interest rate the Government pays when it borrows will increase.  This will mean existing bond/gilt capital values falling, because they are not as desirable as newer, higher interest paying bonds/gilts.  Hold any bonds/gilts you already own but be prepared to sell out of them if a credit rating downgrade becomes likely.  

Corporate Bonds
Corporate bonds have had clear appeal to investors in this low interest rate, high volatility market, but not all of them.  Bonds in troubled Eurozone states carry obvious risk but a higher return.  However, corporate bonds in areas such as the UK, US and more stable European economies should continue to perform well during 2013.  Capital values could fall if the UK loses its AAA credit rating, which is expected over the next 2 years if the economy does not show signs of recovery.

The outlook at the moment is for interest rates to remain low, so demand will be higher for corporate bonds offering more than bank rates, especially if they are well established ‘investment grade’ companies such as pharmaceuticals and consumer staples.  These will be more expensive to buy but will pay higher interest.

For higher yielding corporate bonds that come with a better return, investors need to look at what the risk of default is before going in for the higher returns.  Be careful when investing in corporate bonds issued by banks with exposure to the Eurozone, given the continuing problems in Europe.  

For all fixed interest stock, such as Government Gilts and Corporate Bonds, there is talk of a “bubble” in the markets and a risk of capital values falling, as detailed earlier.  

Whilst higher interest rates on fixed interest investments is good for new investors in terms of getting a higher return, existing investors in lower yielding fixed interest stocks could see capital values fall.  That is because investors would rather put their money into stock giving a higher return and are prepared to pay less for lower yielding stocks.  Fund managers are all talking about the possible “bubble” and will be preparing their fund holdings, just in case rating changes happen.  Keep an eye on the fixed interest sector if the UK’s credit rating is downgraded or interest rates rise.  If you hold fixed interest stock at that time then that will be the time to lock in your profits.

UK Equities
UK equities are likely to show growth throughout 2013, assuming the Government’s austerity measures remain focused and growth returns to the economy.  On its own, Britain can fare well and grow but we will be affected by Eurozone problems and other larger equity markets around the World.  We predict the UK equity markets will remain nervous throughout 2013, meaning profits and losses will be made.  If you are prepared to accept this then UK equities could provide higher returns than bank accounts and fixed interest investments.  

Companies likely to see growth are those with trade overseas in the US, Far East and Asia.  Defensive assets are still doing well, for example healthcare and pharmaceuticals, alcohol and tobacco.  

European Equities - Positive for Long Term Bets
European equities continued to be volatile throughout 2012, with the exception of the stronger countries such as Germany and France, although France has now suffered a ratings downgrade.  Additionally, economic forecasts for growth have been lowered for 2013 across the board.

The outlook for economic growth in Europe is weak and you will need to take a five-year view to see positive returns.  There are growth areas but these are generally from European companies trading outside the EU.  We expect flat returns for 2013.

If you are able to invest for at least five years then select European stocks, particularly from the more developed nations should show growth.

US Equities
The US markets have continued to recover and show growth, with a positive economic outlook for 2013.  The effects of quantitative easing seem to be working, unemployment is falling, retail sales are up and consumer confidence is rising.  Provided austerity measures are maintained then the US then continued growth of an expected 2% during 2013 should be seen.  We are positive about US markets this year.

Asian Equities
Asian markets have had mixed results in 2011 and 2012, primarily as a result of the Western debt crisis.  Chinese equities lost favour at the end of 2011 and later in 2012 due to worsening economic growth predictions and higher inflation.  How Asian markets fare during 2013 will depend on policy made by Western Governments and Central banks, economic growth prospects and inflation.  Despite this, Asian markets are less affected by European markets and more by US markets.  We expect higher growth from the Asian region than most European markets.

Japan
There were ongoing problems for Japan throughout 2012 with industrial output falling as a result of weak overseas demand for Japanese products.  With Western economies slow, this was always a risk.  GDP has therefore slowed although Japan’s parliament has passed a bill to double sales tax to 10% by 2015.  Additionally, there have been a number of instances where the Japanese cabinet has approved further quantitative easing measures to support small businesses and create employment.  We are still positive for Japan for 2013 but growth will be slowed by Japan’s trading partners, if exports are at reduced levels.

Commodities
Commodities in the news are mainly oil and gold.  According to an International Energy Agency (IEA) report, the US will overtake Saudi Arabia as the world's biggest oil producer "by around 2020".  The reason for the prediction is development in the US of extracting oil from shale rock, which has enabled the US to gain significantly more extractable oil resources.
The IEA predicts that the US will be producing 11.1 million barrels per day by 2020, compared with 10.6 million from Saudi Arabia.  Reliance on the Middle East is likely to be less, as a result but the effect on prices is unknown, although falls below $100 a barrel are expected.  Our view is that this will boost the US economy.  Commodities are for higher risk investors, who are prepared to accept the volatility in profits and losses to be made.
In terms of other commodities, the slowdown in the Chinese economy will reduce demand, as will the demand for gold from India.  Market commentators expect growth from an average of $1,679 per ounce to $1,749 per ounce during 2013, although small falls are expected during 2014.

Commodities such as coffee are likely to be more in demand, as a result of more consumers joining the Starbucks / Costa trend.
Commodities are therefore likely to see some growth over the coming year, but nothing as much as has been seen in the past few years.

Global Economies to Watch
In terms of other global economies to watch for 2013 they include the US, Japan, Norway, Australia, Canada, Korea, Singapore, Brazil and Africa.  Australia is likely to overtake Spain as the World’s 12th largest economy in 2013.  The US and China are likely to remain 1st and 2nd, with the UK 6th.  Emerging economies are likely to provide more opportunity for growth than other Western economies.  China’s economy could also pick up if we see economic growth from the West.

In terms of other investment markets, beware of buying into fixed interest stocks during 2013 if austerity measures are not performing as they should and the UK economy is not growing.  That will be the catalyst for a credit downgrade.

Index linked Gilts and stocks are expensive but we are expecting interest rates to rise and with that will come inflation.  Likewise the usual result of quantitative easing is also higher future inflation.  If you are prepared to receive low returns when inflation is lower, higher returns could be on the cards in the next few years to come.

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