January 1, 2013 12:55 pm

Markets can weather storms of 2013

Global markets weathered some huge uncertainties in 2012, of which the biggest were the intensification of the eurozone sovereign debt crisis, doubts over the outlook for the Chinese economy, and worries about the US fiscal cliff. What might 2013 bring?

Ed Yardeni at Yardeni Research believes that, having survived another year of living dangerously, the markets can do it again.

“Europe and China seem to pose less danger for investors in the coming year,” he says. “The US economy is actually in remarkably good shape, as long as the fiscal cliff is averted.”

Stocks on Wall Street ended Monday, the last trading session of 2012, on a high note ahead of a vote in the US Senate on Tuesday approving a bipartisan budget deal negotiated with the White House to avert the fiscal cliff. Nearly all markets were closed on Tuesday.

Uncertainty about whether America’s politicians could agree a deal to avert the fiscal cliff of looming spending cuts and tax rises had dominated market sentiment in the final weeks of 2012. Yet Andrew Wilkinson, chief economic strategist at Miller Tabak, is optimistic about the prospects for the US economy.

“We estimate that for 2013 as a whole the US economy will continue to create jobs and grow at around 3 per cent as the global economy pulls out of recession,” he says.

“The outcome of the fiscal discussions in Washington is likely to leave a positive aftertaste for investors who quickly want to get a rally for stocks back on track.”

There is an undercurrent of optimism about the coming year among analysts. For example, Julian Callow, chief international economist at Barclays, expects 2013 to be the year in which “tailwinds finally begin to overcome headwinds”.

“However, the economic effect of this is likely to be apparent more in 2014, and risks – while moderating – are still present,” Mr Callow says.

Central banks, particularly the Federal Reserve and Bank of Japan, look set to persist with an aggressive pace of asset purchases during 2013, although EU central banks are likely to be more cautious. Overall, the ultra-low real interest rates – and expectations thereof – in the ‘core’ markets have resulted in a shift towards stronger risk appetite.”

The pivotal event for the eurozone in 2012 was the European Central Bank’s willingness to do “whatever it takes” to save the euro and its pledge of potentially unlimited government bond buying.

Gary Jenkins at Swordfish Research says the ECB has taken the short-term risk of a eurozone sovereign liquidity crisis off the table.

“Thus the major risk to the eurozone in 2013 is one of a slightly slower-burning nature,” he says. “It is unlikely that any incumbent politician will invoke a move away from the euro but there remains the possibility that someone not currently in power will run on a mandate of ‘default and be damned’.”

Meanwhile, concerns about the possibility of a “hard landing” for the Chinese economy also appear to have faded in recent months.

“The Chinese government and the People’s Bank of China have been successful in stabilising growth in 2012,” says Ashley Davies at Commerzbank. But he warns: “Some investors are looking for the new leadership to turn on the stimulus taps in the year ahead and for activity data to rebound.

“However, stabilisation does not imply a rebound and as such there is scope for disappointment as the market adjusts to the reality of sustained slower growth.”

And there could be some further positive developments for the global economy from Japan as the newly elected Liberal Democrat party puts pressure on the country’s central bank to take aggressive stimulus action.

“Japan finally emerging from a double decade of the doldrums would really be the icing on the cake for investors next year,” says Oliver Wallin at Octopus Investments.

“It is early days, though, and it will be interesting to see how responsive the BoJ is to political pressure.”

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