Graham Campbell: why 2013 will be healthy for equities (but not bonds)

2012 is likely to be remembered as another tough year for financial services. 

Job losses have been high as new issues, corporate activity and turnover have dried up.  Regulation continues to increase the cost burden on the sector and markets have remained volatile which has deterred investors from committing new money.

Our message throughout 2012 has been consistent; relatively low earnings valuations and healthy dividends have meant that investors are being ‘paid to wait’ for the economic upturn. 

Meanwhile yields on cash and bonds remain poor. 

Reasons to be bullish

As we enter December, however, we feel increasingly bullish as it is clear that some of the ‘tail risks’ have drastically reduced.  Even if we do not experience meaningful economic growth in 2013, equity markets should start to anticipate an eventual recovery. 

It appears the eurozone has agreed terms with the IMF which will enable Greek debt to be reduced by allowing a further injection of €44b billion of loans. 

The crisis is far from over, but it appears that a default has been avoided and mechanisms are now in place to support troubled Sovereigns and banks if necessary.

Now uncertainty surrounding the election of a new US president has passed, attention has turned to the Budget Control Act of 2011 which could result in tax increases and spending cuts unless a highly partisan Congress reaches budgetary agreement by the year-end. 

This has potentially significant negative consequences for both the US economy and, indeed, global growth if we reach this ‘fiscal cliff’ and consensus cannot be achieved.  Nevertheless, we continue to believe that, on this occasion, politicians appreciate the implications of failure and will reach a compromise.

Even if these two issues are resolved, it will not provide a panacea to kick-start global economic growth but may, at least, reduce the probability and scale of the downside risk and provide a more stable environment for corporate and personal investment.