View the article online at http://citywire.co.uk/money/article/a645530
Bullish investors set to pounce on bond-like shares
2013 will be another volatile year in equity markets, but a winning one too, say global investors.
Global shares, the more bond-like the better, are being heavily tipped by fund managers and investment houses to enjoy more gains in what is expected to be another volatile year in stock markets.
While the pessimists are still sounding the alarm over the big threats to global economies – particularly the threat of a US fiscal cliff and eurozone crisis – the optimists are shouting loudest, eyeing a winning 2013 for shares, or equities, in their crystal balls.
Major global investment houses and banks including BlackRock, Bank of America Merrill Lynch, Goldman Sachs and Deutsche Bank expect strong returns for equity investors, amid improving but still low global growth.
Their optimistic viewpoint, tempered partly by the uncertainty over the potential fiscal cliff, comes at the end of a winning year for share investors, with global equities up 16% as measured by the MSCI World index. ‘You had to try hard to lose a lot of money in 2012,’ said Ewan Cameron Watt, a senior investment strategist at BlackRock. His colleague Richard Urwin noted that in 2012 ‘the more an equity has looked like a bond, the better the equity has performed’.
Such dividend paying shares are expected be the favourite alternative to low-yielding G4 government bonds as central banks' monetary policy remains loose.
Cameron Watt said: 'It is not the best possible economic environment for equities, but frankly with the prices we've got, it doesn't need to be.'
Bank of America Merrill Lynch says yield-seeking investors will make a decisive rotation from these bonds to less expensive and higher yielding equities and investment grade corporate bonds. This rotation represents the first of three ‘r’s for BoA Merrill Lynch alongside Reflation (more quantitative easing) and Re-gearing (major companies borrow at low interest rates and buy weaker rivals).
The shift to equities in the furious search for yield won't be a smooth ride however. ‘Whilst real losses are likely from [cash and government bonds] equities are priced to give decent real returns for patient investors, who are prepared to endure the risk of near-term capital volatility,' says Andrew Bell, chief executive of the Witan Investment Trust .
Investec adds a caveat for investors piling into dividend paying companies to get their income. ‘Market indices around the world are dominated by companies that have seen better days. They look cheap and offer tempting dividend yields but often face serious strategic challenges.’
Investec favours smaller companies for returns next year. In 2012 this strategy would have paid off in the UK, with FTSE 250 companies (up 25% year to date) vastly outperforming their larger competitors on the blue chip index (up 11%).
More positive than 12 months ago
UK-based fund managers are in general more upbeat about markets than they were this time last year. According to a poll by the Association of Investment Companies, 87% of managers expect markets to rise next year, compared to 71% last year.
‘Risk assets will perform moderately well but with a disappointingly high level of volatility,’ Euan Munro, co-manager of the £19 billion Standard Life Inv Global Absolute Return Strategies fund, told Citywire.
A separate survey of global financial workers by the CFA Institute drew a similar conclusion: equities will outperform all other asset classes.
There remains plenty of reason for caution however, and the bears have not been subdued. Fund managers at Aberdeen Asset Management take a more cautious stance. ‘We still prefer to have a defensive bias within portfolios. Over the last 12 months that bias has moderated. We’ve seen selective opportunities in businesses with a bit more cyclicality in their earnings,’ says Jamie Cumming, manager of the Aberdeen Ethical World fund .
Anthony Cross, manager of the Liontrust Special Situations fund, reminds investors that 'it will be really tough over the next 12 months'. Even the most bullish investors cannot deny the lingering threat from the eurozone, even if they believe policy actions have put a full-blown crisis on ice.
European hopesOnly by drilling down into stock market sectors and individual companies, do the real differences between outlooks become apparent. The AIC survey shows a strong bias towards financial stocks, while equities in Europe and emerging markets are most widely tipped to outperform.
Major financial institutions including Deutsche Bank have also thrown their weight behind trampled-down European assets. ‘We are positive on the outlook for euro area equities based on the pick-up in global growth. We expect stronger global growth to support earnings, and a decline in euro area risks to support ratings,’ the bank states in its outlook for 2013.
Just make sure you avoid companies that make too high a proportion of their money from the hardest-hit parts of Europe or are too highly-regulated, says Cedric de Fonclare, who manages the European Special Situations Fund for Jupiter.
The Citywire AA rated fund manager says this includes utilities, telecoms companies and some banks. Conversely he is overweight sectors such as basic materials (Syngenta, the German agribusiness giant, is his second biggest holding) that are ‘much more international, less exposed to political risk and capital light businesses which gives them the opportunity to allocate capital to where they see the opportunities.’
Many investors say they are also backing the ‘survival of the fittest’ – the theory that strong companies will get stronger and gobble up smaller competitors – and ‘self-help’ companies in the UK. These are the firms whose management are taking drastic remedial action.
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In this guide to investment trusts, produced in association with Aberdeen Asset Management, we spoke to many of the leading experts in the field to find out more.
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