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Multi-manager view: Four investment themes for 2013

John Ventre

Financial markets in 2013 will be driven by a mix of short- and long-term themes. Here are four to bear in mind:

The quality premium: In 2010/12 there emerged a new “nifty 50” – stocks that could turn out earnings growth regardless of economic condi­tions. They were typically glo­bal­ised non-financials, making and distributing goods con­sumed daily in large quantities, such as Nestlé and McDonald’s.

The opposite was the value discount. Companies sensitive to macro threats became as cheap as the quality stocks became expensive.

The risk in 2013 is that the difference between the two will start to narrow. It might snap back suddenly or reduce gradually. At a technical level, quality is over-owned and new liquidity coming into equities will favour cheap value.

The emerging market con­sumer: In the West, the trans­ition from a production- to a consumption-oriented econ­omy took the best part of a generation. Until now, emerg­ing market consumer spend­ing has tended to be concen­trated among elites who have bought luxury goods, sports cars and limousines, medical services, couture and the like. This year is not going to see a sudden transformation to mass consumption.

We are watching the contin­ued gradual upgrading of the “bottom billion” ­- the billion or so people who until recently have been largely excluded from the modern industrial economy. As they continue to be urbanised and formally employed, they will spend more on basic goods and services – mobile phones, confectionery, bank accounts.

Emerging market inflation: The rise in urbanisation and employment means we should expect the persistence of emerging market inflation. This flows into the developed world through the costs of fuel, food and clothing.

But it directly affects monetary and fiscal policy in markets which are becoming important as sources of global economic demand. In China, food price inflation reached double digits in 2011, forcing the authorities into a significant tightening of monetary policy which impacted the global economic outlook and, as a direct result, equity prices. In Brazil, inflation is running at about 6 per cent in an economy with unemployment below 5 per cent. If the central bank tightens policy to slow growth and stabilise prices, it could impact on structural investment in this important producer of commodities.

Financial regulation: The light-touch regulation of the credit boom arguably led to a misallocation of capital. The danger now is that the pendulum is swinging too far the other way. While the cost of capital is strikingly low for global non-financials, such as the nifty 50, it remains cripplingly high for financials.

The effects of the capital requirements of Basel III and the regulatory impact of Dodd-Frank are being felt in the banking sector. Liquidity in financial markets has fallen, in some areas severely. The ability of banks to revive economic activity is limited.

The Solvency II requirements, affecting insurers, are having less visible but nonetheless dire consequences. They are now in an ever-tightening value trap. Instead of buying equities, which would be most likely to provide future liquidity, they are legally obliged to buy government bonds. These in turn, partly due to insurers’ forced buying, have become shockingly expensive, higher risk and less likely to provide the funding needed to match the future liabilities for which they are intended.

John Ventre is head of multi-manager at Skandia Investment Group


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