Know what to expect from major asset classes in 2013

UNCERTAINTY has been characteristic of investing in 2012. As headwinds continue to shake global investment markets, this will likely continue into 2013. But knowing what to broadly expect will help you to align your portfolio and identify opportunities so that, this time next year, you will have achieved decent investment returns.

HEADWINDS
The Eurozone crisis, US fiscal cliff, and a slowdown in China have dominated the investment landscape recently. Tensions in Asia and the Middle East have also done little to calm investors. Consequently, many have avoided committing their capital, preferring the security of cash. But keeping your powder dry could be costly. Cash is unlikely to beat inflation, and leaves you exposed to real term losses. In 2013, you’ll need to put your money to work to protect and grow your capital.

FIXED INCOME
Recently, in a flight to safety, many have parked their cash in government bonds. These are now unattractive. Intense demand has pushed returns to record lows, and most now offer negative real yields. For example, the UK’s 10-year government debt has recently offered returns below 2 per cent, at a time when inflation has been well above that level.

If you are looking to add fixed-income to your portfolio, you might consider corporate bonds. Some argue that these are also in a bubble, but Ian Spreadbury of Fidelity disagrees, saying “recent hysteria around corporate bonds is exaggerated”.

Low yields on government debt, austerity, and loose monetary policy add to corporate bonds’ relative allure. Spreadbury says that “yields could go quite a bit lower because the environment of financial repression we are in today is likely to continue”.

SHARES
Surprisingly, UK shares have not performed disastrously in 2012. So far, the FTSE 100 has returned 6.4 per cent – excluding dividends.

Although stocks will continue to be at the mercy of macro pressures in 2013, there are encouraging signs that it could be the first post crisis year. Tom Elliott of JP Morgan argues that the FTSE 100 will “be more influenced by the global environment than the domestic environment”. As headwinds calm, stocks could be boosted.

Central banks are also likely to continue monetary easing in 2013. This will help to support stocks.

For those closer to retirement, equity income funds may appeal. Some of the best performing funds – like JO Hambro’s equity income fund, which has returned 24 per cent in the last year – invest in high quality corporates with a track record of dividend growth. Compared to bonds, they offer higher yields, and also have the potential for capital growth too.

Ben Lofthouse of Henderson, says “companies are generating cash and have made great strides in strengthening their balance sheets”. He expects dividends to grow by around 8 per cent in the next year. However, he adds that “the risk is only worth taking if investors believe that the worst of the economic crisis is behind us”.

PROPERTY
Property may struggle again in 2013. Although the Royal Institute of Chartered Surveyors (RICS) forecasts that house prices will rise by 2 per cent next year, Howard Archer of IHS Global Insight thinks property prices are likely to be flat, and a significant turnaround in house prices is still some way off. But it isn’t all bad news for buy-to-let investors. RICS predicts that rents will grow by 4 per cent.

GOLD
When central banks pump liquidity into the market, many seek refuge in gold. However, to some extent, the yellow metal has become a speculative asset. While there is a place for gold in your portfolio, physically holding it is costly, and gold doesn’t provide an income.

Goldman Sachs forecasts that gold prices will peak in 2013, as the US economy begins to improve. It says that “the risk-reward of holding a long gold position is diminishing,” and it targets a price of $1,825, before it edges downwards.

THE TIME IS NOW
Many people choose to leave reviewing their investments until the New Year. However, the longer that you leave it, the more you will put it off. The best time is probably now.

FORECASTS FOR 2013

STOCKS
Mike Ingram of BGC Brokers predicts that the FTSE 100 will end 2013 at 6,300, and the MSCI emerging markets index could rise by 15 per cent.

BONDS
Howard Archer of IHS Global Insight thinks that UK 10-year gilt yields will end 2013 at 2.4 per cent.

GOLD
The yellow metal will peak in 2013 at around $1,800 per troy ounce, predicts Jeffrey Currie of Goldman Sachs.

PROPERTY
House prices are set to rise by 2 per cent in 2013, according to Simon Rubinsohn of the Royal Institute of Chartered Surveyors.

Predictions from the experts

Forecasts are made assuming that there will be no major collapse in the global investment markets