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Investment round-up 2012: QE and the euro set the tone


The new year’s chimes of Big Ben had barely receded in January before the eurozone crisis forced its way back into the headlines. The risk of Greece defaulting on its sovereign debt continued to be a major concern as its government failed to agree terms for a bailout from the EU.

In February the Greek Government finally approved the austerity measures needed to secure its second EU bailout in two years. However, the crisis then shifted to Spain amid fears that the euro could collapse, with Portugal and even Italy also caught up in the contagion.

The eurozone crisis rumbled on for much of the first half of the year. JPMorgan Asset Management global strategist Tom Elliot says sentiment started to change in July when the European Central Bank offered to take steps to save the euro, while Germany became more pro-active in helping to solve the crisis.

“As a result, continental European equities have enjoyed a strong rally since June, making them one of the best-performing asset classes,” he says.

But as 2012 draws to a close, the challenge to find a final solution to the eurozone’s problems remains, with the region having fallen back into recession. In December Spain finally accepted a bailout for its beleaguered banks, while Cyprus looks likely to become the fourth EU country to be bailed out by the EU after seeking help to prop up its banking system.

Quantitative easing

Among the other standout events of 2012 was quant­i­tative easing. In February the Bank of England injected another £50bn into the UK economy, exten­d­ing the stimulus programme it had started in 2009.

Buying back assets such as gilts was the Government’s attempt to keep recession at bay, but it could not halt the slip into a double-dip recession. Another £50bn of QE was announced in July, bring­ing the total amount injected into the economy to £375bn. Towards the end of the year the UK had just emerged from recession.

Some parts of the finance industry expressed concern about the unwelcome side-effects of QE, such as a bond bubble.

Towry chief investment officer Bob Dawkins says: “With an indebted developed world, the yields on many developed world government bonds, inclu­ding gilts, have hit record lows in 2012, with yields generally below the prevailing rate of inflation. Gov­ernment bonds are benefiting from a perceived safe-haven status and therefore investors are accepting a return of capital rather than a return on capital. This will not always be the case and once yields start rising capital values will start to fall. The catalyst could be higher inflation, increased optimism about the economy or a loss of confidence around a country’s ability to manage their debt level.”

There were also concerns within the pensions ind­ustry about falling gilt yields reducing annuity rates and increasing liability for pension funds, poten­tially resulting in losses. Others felt the euro­zone crisis should shoulder some of the blame, but those looking for income from bond markets still found themselves having to look higher up the risk ladder.

Royal London Asset Management senior client portfolio manager Ewan McAlpine says: “As developed market government bonds, with the exception of those in peripheral European markets, have become more expensive and lower-yielding, investors have turned to the credit market, which has been supported by low default rates and a receptive and yield-hungry investor audience. This has resulted in yields that have fallen even more quickly than those of government bonds.”

QE also played a part in the fortunes of the US during 2012, along with November’s second-term election of President Barack Obama.

PSigma American fund manager James Abate sees 2012 as the year when the positive effects of post-credit crunch restructures on margins and profits ran out for most US companies.

Abate says: “Our optimistic outlook since 2009 was anchored in our belief that the restructuring and streamlining of corporations we witnessed after the collapse of Lehman Brothers and during the successive recession was the most effective, efficient and broad-based that we have seen in our careers. By the spring of 2012 we no longer felt that the US stock market could rely upon strong profit growth to power its advance.”

The US Federal Reserve has had a QE policy in place since 2009 and in September chairman Ben Bernanke said it was committed to an open-ended policy of QE and would do “whatever it takes” to stimulate the US economy.

But as 2012 drew to a close the US was trying to avoid a “fiscal cliff” – a combination of tax hikes and government spending cuts due in 2013 that could push the country back into recession.

In China, leadership changes in November came amid acceptance of slower regional growth in the long term. F&C director of global strategy Ted Scott says: “I think the new regime and the old regime in China have been pragmatic in reacting to the slowdown in growth. Up until now China has depended on strong export growth and infrastructure spending but wants to rebalance the economy towards consumption, which is difficult to accelerate.”

Closer to home, investment fund charges became the centre of attention in 2012. At the end of May the AIC stopped publishing the total expense ratio for investment trusts on its website, replacing them with an ongoing charges figure calculated by Morningstar.

Henderson Investment Trusts portfolio manager James Henderson says: “The big issue is consistency. I was in favour of the move towards ongoing charges, as anything enabling people to compare investment trusts, especially with the RDR, has got to be the right move.”

The row about full disclosure of fees also took in open-ended funds. The True and Fair Campaign, led by Gina and Alan Miller at SCM Fund Management, continued its attack on hidden fund charges, forcing the Investment Management Association to issue a robust defence of the way investment management firms charge for their services. In September AMI published guidance on enhanced disclosure of fund charges and transaction costs for UK authorised funds. It recommended disclosure of the ongoing charges figure rather than the annual management charge, as ongoing charges allow for transaction costs that cannot be quantified easily in advance as part of an AMC.

Click here for a month-by-month look at the year in investments


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