Russell Investments’ team of global investment strategists has released its 2013 Annual Global Outlook, highlighting core expectations for capital markets and six central issues for the coming year.
Russell’s forecast for 2013 predicts a modestly positive, albeit volatile investment environment, noting that investors are likely to see more signs of a global recovery, driven primarily by a continuation of US and Chinese economic growth. Even so, volatility will likely remain elevated through most of the year, driven by ongoing recession and solvency fears in the eurozone.
Russell’s investment strategists discuss the following six key themes that they believe will have the greatest impact on markets and asset returns in 2013:
1. U.S. market: Addressing long-term issues at last?
2. Eurozone: Finding the right policy mix
3. Global equities: A rising tide may not lift all boats equally
4. Emerging markets: Due for outperformance
5. Global currency outlook: More of the same, but risks aplenty
6. Commodities: It’s not just about monetary policy
Russell has forecast since 2009 that the U.S. economy would follow a square-root shaped recovery pattern, and events have played out consistently with these expectations. For 2013, Russell’s base case scenario anticipates a continuation of this reluctant-yet-measurably-positive recovery pattern.
“Even though returns will be lower during this recovery process, we do think that they are identifiable and attainable”, said Pete Gunning, global chief investment officer, Russell Investments.
The squeeze play: Searching for real returns in a yield-starved world
On the other side of the square-root shaped recovery with real interest rates in negative territory is the reality that investors still demand a real return on their assets. In view of the dynamics of the US recovery, lingering impacts of the Global Financial Crisis and intervention by the US Federal Reserve, Russell forecasts that the net effect on investors will be that of “squeezing” them out of traditional safe-haven assets and forcing them further up the risk curve.
“Since only positive real returns build wealth, investors are forced to confront the question of what is to be done in a yield-starved world. This ‘squeeze play’ impulses people into riskier assets; we continue to advise clients to proceed purposefully and with strategic discipline,” said Gunning.
“For investors, this means attention to every detail of their portfolio management. We believe regional diversification will need to be firmly in place, as the economic center of gravity will continue to shift. As traditional investments remain flat, alternatives likely will matter more than ever. And volatility, while it certainly brings market stress, will also bring market opportunity for multi-asset, adaptively-managed portfolios,” he said.
Russell’s Core Expectations for 2013: Highlights
- The square-root shaped recovery will continue, with US economic growth of 2.1% for 2013, increasing to 2.5%-2.75% by the second half of the year.
- Tepid U.S. core inflation for the medium term at 1.9%.
- US 10-year Treasury yield at 2.15% by year-end 2013.
- Real-time indicators are not pricing in a fiscal-cliff disaster, but rather a smaller degree of fiscal drag.
- A cyclical recovery for the Chinese economy delivering GDP growth of around 8% in 2013.
- A eurozone which will remain intact, with a continuing tug-of-war between deflationary austerity and reflationary monetary policy.
Commenting on the outlook for Australia, Russell’s Global Head of Investment Strategy, Andrew Pease said the local economy would face several headwinds in 2013 and very few tailwinds as the two-speed mining driven economy merged into one at fairly mediocre speed.
“We’re now beginning to see a reversal of the rising incomes and growth supported by booming commodity prices, as evidenced in declining nominal GDP growth. For 2013, we expect real GDP growth may end up between 2.0-2.5%. Also, it’s unlikely the government will achieve its fiscal surplus target, despite pushing ahead with the largest fiscal tightening since 1970,” Pease said.
As of early December, Russell’s composite value indicator put the Australian share market at around one-quarter of a standard deviation undervalued, or 7% undervalued.
“We think the market will struggle to close this undervaluation gap during 2013, but the market will be supported by strong dividends, which are likely to provide better yields than those available through term deposit rates,” Pease concluded.
For complete findings and details on the themes and forecasts from Russell’s 2013 Annual Global Outlook, click here.
