THE prospects for the US economy, slower growth in China, and European summits all weighed on the minds of investors in 2012. And this led many to seek shelter in safe havens, like cash.
But now “investment austerity” is set to characterise the investing landscape in 2013. The new normal – low yields, greater correlation between the performance of asset classes, and waning economic growth – means that attractive investments will remain relatively scarce. The pre-crisis days of high returns, without taking on much risk, are gone for the foreseeable future.
But there still are opportunities for savvy investors who are able to look beyond the headlines, adopt a disciplined approach, and set realistic long-term investment goals.
For example, despite talk about economic and political problems in the Eurozone, much of Europe remains fundamentally strong. GDP growth may be sluggish, but the European corporate sector has a wealth of world-class companies.
Corporate Europe has become more dependent on emerging markets and the US, rather than on its own domestic economies. And these companies have taken advantage of the crisis to clean up their financial houses – unlike their governments.
Compared with historical averages, equity valuations look cheap, due to risk aversion and deleveraging by international investors. Therefore we expect that recent underperformance may be coming to an end. We continue to emphasise the importance of “resilient equities”, which exist in different sectors across the continent, from healthcare to industrials. These companies operate in industries with high barriers to entry, enjoy superior pricing power, and have a high percentage of recurring sales. They are exposed to fast-growing regions, and have robust balance sheets.
While the growth potential of emerging markets is not a new phenomenon, we are at an inflection point. The IMF estimates that 2013 will be the first year where the total GDP of these emerging markets exceeds that of advanced economies. And given the current challenges facing developed nations, we see this relatively strong performance continuing.
We expect the Asia sector (excluding Japan) to attract the most investment, followed by Latin America, emerging Europe and Africa. As the largest regional group within emerging markets, Asia offers more liquidity for foreign investors, as well as potentially stronger currencies. At the same time, interventionist policies by some governments in Latin America may pose risks to asset prices, while emerging Europe may remain in the shadow of its deleveraging neighbour.
ACTIVE ON RISK
Another issue playing on the minds of investors is that of rising interest rates, which have resulted in exaggerated fears about fixed income securities. Investors that look beyond these risks, however, and select actively managed investments may, in fact, benefit from higher yields over time.
Risk premiums declined in fixed income markets around the globe during 2012, making defensive positioning important. But this year, an emphasis on shorter maturities, favourably mispriced sectors, and ample liquidity should provide attractive risk-adjusted returns. It will also provide investors with the flexibility to reposition their portfolios when better opportunities present themselves. Being active and remaining nimble is key to navigating what promises to be a more nuanced fixed income environment.
These are just a few examples of the opportunities available. But they should not detract from the importance of building a diversified portfolio. Risk should be based on your own personal circumstances, and you must understand how much you are willing to tolerate, and how liquid you would like your portfolio to be. In many cases, investors need to face the truth, and recalibrate their expectations of the returns that they can expect to achieve over time, without going beyond their risk tolerance.
Finally, it has never been more important for investors to actively review the state of their portfolios with their advisers. This will help your portfolio to remain aligned to your long-term objectives.
George King is head of portfolio strategy at RBC Wealth Management.