Our first bulletin of 2013, which contains the following points:
- Despite the volatility, investors fare better than predicted during 2012 with many asset classes making double digit returns
- A last minute deal agreed in the US House of Representatives avoids swingeing tax increases and government spending cuts
- No one can predict what 2013 has in store for investors but building a well-diversified portfolio of high quality assets remains a sensible strategy
The year that was
- Investors fare better than predicted during 2012 with many asset classes making double-digit returns
- Equity income investors reap the benefits of rising dividend payments and 2013 also looks promising
- Experts’ predictions confounded as the eurozone survives and China avoids a ‘hard landing’
Out with the old and in with the new: 2012 mainly surprised on the upside; after a confident start, markets wobbled mid-year on fears that the eurozone was about to implode but thanks to a promise from Mario Draghi to do “whatever it takes”, business resumed as normal by autumn. The business of prediction is notoriously tricky and mostly futile but it doesn’t stop some of the City’s best economic brains from trying to see into the future. A review of predictions from the UK’s top 35 economic teams showed most hopelessly awry but congratulations go to the Economic Intelligence Unit which scored top points. For investors, the final outcome could have varied enormously of course depending on how one’s assets were allocated but, for most, the year was positive. Leading the world was Europe where the FTSE World Europe Index advanced around 20%; Wall Street followed with London a respectable third – the FTSE All-Share gained around 12%. And the laggards? Perhaps a surprise to many investors, given the fact their economies were mostly growing quite smartly, the MSCI Emerging Markets Index rose just shy of 10%.
More predictable was Tokyo where the Nikkei 225 Index rose less than 4% for the year; and that was only achieved after a near-10% rally in the last few weeks of 2012. The world’s third-largest economy is, once again, flirting with recession: the latest batch of economic data for November continued to be weak with industrial production slumping 1.7% from the previous month. Pundits have for many years cited a seemingly compelling case as to why, finally, Japan should emerge from its lost decade or two. Will 2013 be the turning point? A recent change of government might be the catalyst with the country’s new Prime Minister, Shinzo Abe, urging monetary policymakers at the Bank of Japan to take bolder steps to boost economic activity. His exhortations have so far seen the yen fall sharply against the US dollar, boosting Japan’s exporting companies and, in turn, the stock market. Whether it will last is another matter, of course; but with the market undeniably cheap, some investors may see their way to including a little bit more of Japan in their portfolios.
There were some real winners too: income investors for a start. The latest figures from Capita Registrars show that it was a record year for UK dividend payments. Initial estimates show that dividends for 2012 are forecast to exceed the pre-crisis peak of £77 billion; and that compared to 2011, dividends are likely to have risen by 16%. Of more relevance, Capita estimates that dividends will increase by 8.0% in 2013, just ahead of their long-run annualised increase rate of 6%. Many companies are sitting on large cash piles and are able to dig deeper into their reserves to increase dividends. Major institutional shareholders are likely to maintain pressure on them to do so and even extend these demands to include special payouts and share buybacks. With inflation likely to remain within the 2–3% range, according to forecasts from the Bank of England, dividend payments are likely to be one of the few sources of income to beat inflation and offer some certainty to investors.
What else might we see in 2013? Whilst flows of rising equity income are obviously attractive, there is the issue of how companies continue to grow their underlying businesses in order to fund future dividend distributions, and this is where uncertainty emerges. For the foreseeable future, financial markets are likely to continue to be dominated by economic news and other ‘events’, just as they were last year. Growth in global asset prices have been driven by a concerted global effort, as governments and central banks adopt new, expansionary policies as they strive to boost economic growth. Having embarked on this strategy for growth, global policymakers have deployed both conventional and, increasingly, unconventional tools to achieve their ends. Having only achieved limited success to date, 2013 is likely to see governments and central banks redouble their efforts, which is likely to be supportive of asset prices. On the macroeconomic front, China has managed to avoid a ‘hard landing’ with growth resuming: the latest official data shows Chinese manufacturing during November growing at the same pace as October, with the purchasing managers’ index registering 50.6. Any reading above 50 indicates growth. The eurozone is being kept together by political determination and ECB money in the run-up to crucial German elections in the autumn when Angela Merkel will seek re-election for a third term. So, for now, that only leaves the worrying problem of the US ‘fiscal cliff’.
- US House of Representatives goes to cliff edge before agreeing a deal to avoid swingeing tax increases and government spending cuts
- President Obama hails the deal but says US deficit is still too high
After weeks of uncertainty and much rhetoric on the part of both Democrats and Republicans, which has cast a shadow over global financial markets, US politicians yesterday reached a last-minute deal to avert a fiscal cliff of huge tax rises and spending cuts. After the House of Representatives passed the bill by 257 votes to 167, President Barack Obama hailed the deal reached saying the measures were “just one step in the broader effort to strengthen the economy”. Speaking before returning to Hawaii for his interrupted Christmas holiday, Mr Obama told a White House press conference that in signing the law he was fulfilling a campaign pledge.
“I will sign a law that raises taxes on the wealthiest 2% of Americans while preventing a middle-class tax hike”
President Barack Obama
But he went on to say that the US deficit was still too high and while open to compromise on budgetary issues, he would not offer Congress spending cuts in return for lifting the government’s borrowing limit, known as the ‘debt ceiling’.
The fiscal cliff measures – cutting government spending and increasing taxes dramatically – came into effect automatically at midnight on Monday when George W Bush-era tax cuts expired. The 1 January deadline triggered tax increases of about $536 billion and spending cuts of $109 billion from domestic and military programmes. Economists had warned that if the full effects of the fiscal cliff were allowed to take hold, the resulting reduction in consumer spending could have sparked a new recession. The compromise deal extends the tax cuts for Americans earning under $400,000 (£246,000) – up from the $250,000 level Democrats had originally sought. In addition to the income tax rates and spending cuts, the package includes rises in inheritance taxes from 35% to 40% after the first $5m for an individual and $10m for a couple; plus an increase in capital taxes of up to 20%, but less than the 39.6% that would have prevailed without a deal.
There had been intense pressure for the vote to be passed before financial markets reopened today and unsurprisingly markets have responded positively to the move. In Asia, Hong Kong’s Hang Seng Index opened up 2.1%, while South Korea’s Kospi added 1.7% and Australia’s ASX 200 rose 1.2%. Here in the UK, shares jumped 1.5% on opening; whilst in Europe, German stocks gained by 1.6%, France’s CAC 40 rose 1.4% and Italy’s stocks gained 2%. So for now, this means that investors’ nerves have been calmed and 2013 is able to begin on a more stable footing than would otherwise have been the case.