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How to play the world in 2013 (using cheap investment trusts)

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How to play the world in 2013 (using cheap investment trusts)

2013 has got off to a good start.

Stock markets are riding high and corporate and economic data have defied expectations, playing straight into the hands of risk asset bulls.

But a strong beginning to the year also means an expensive one, so strategists are turning their eye to a corner of the market known for its bargains.

To play the key themes of 2013 - steadying growth in China, caution over the US and hopes for improving politics in emerging markets - investment bank JP Morgan is keeping a watchful eye on the closed-end sector and has recommended a series of investment trusts in a note to clients.

Their optimism for the sector is not without reason; the FTSE Equity Investment Instruments Index outperformed the FTSE All Share in 2012, producing a total return of 14.8%, and stand out performers like Aberdeen's New Thai generated returns of more than 50%..

Analyst Chris Brown says there was a strong Asia bias among the sector's best trusts in 2012, and expects this to continue as emerging markets maintain their lead over developed ones.

'[Emerging market] equities are likely to continue to be driven by strong fund flows, helped by stabilisation in Chinese growth and steady improvement in overall bank lending conditions,' Brown explained.

Within emerging Asia, India is the bank's top pick, though it also likes the Philippines and Thailand.  Owing to the looming debt ceiling risks it is concerned about the US, while in the alternatives space, hedge funds could deliver mid to high single digit returns to investors.

Cheap picks? 

With the difficulties of 2012 still lurking, it will come as no surprise if the tensions between low inflation - a result of lacklustre growth - fiscal tightening and the boundaries of near-zero interest rates soon start to bite.

Against this backdrop, to capture the best opportunities within global growth, Brown and his investment companies team suggest investors take a look at discounted Alliance Trust (-13%), which has an 11% weighting to Asia and last year grew its share price by 16%, and turnaround play Caledonia, whose shares at a 19% discount to net asset value (NAV) and where its manager's focus is on general equities.

Pacific Assets could offer exposure to the Asia (ex Japan) theme, which over the 12 months to December grew its share price by 26% and its NAV growth outperformed the MSCI Asia (ex Japan) Index by 25.5% versus 13.1%. Again, the trust's shares trade at a discount to NAV (-8.9), but there is also Aberdeen's New Thai for investors who think it can continue to match last year's double digit gains.  Witan Pacific (-11%), which last year brought respected Asia managers Gavekal and Matthews on board, replacing Nomura, would also offer exposure to Japan.

Here is JP Morgan's full recommendations list:

 

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