Bond yields at the end of 2013 to be similar to where they are today. However, this not to rule out the possibility of big swings in interest-rate trends during the course of the year, according to Bank Sarasin.
The latest Global View published by Bank Sarasin’s Research team, stated that the year 2013 would be dominated by two themes: the search for yield in a low interest rate environment and the uncertainty over Euroland and the economy. In a reasonably buoyant economic climate in the early part of the year, the search for yield will have priority and will create a brief window of opportunity for investors. The pace of growth will then ease off in the second half of the year, thereby rekindling the debate over debt reduction strategies. This will make defensive currencies more popular again. Central banks will continue to follow an expansionary monetary policy. While the general level of uncertainty is still so high, a major reallocation from risk-free assets into equities is unlikely. Bank Sarasin’s favourite shares for 2013 include Roche, Ahold, SAP, Deutsche Post and Partners Group.
According to Bank Sarasin’s analysts, the outlook for the global economy in 2013 is also likely to be largely determined by political measures due to the high level of debt among industrialised nations. The USA and Europe are pursuing two fundamentally different debt-reduction strategies. While the USA is going all-out to stimulate growth, austerity programs in Europe threaten to put growth at risk. There is a general concern that the austerity measures planned for 2013 will create a substantial headwind for global demand. As a result, the surge in momentum at the outset of 2013 will slow in the second half of the year. This has been the pattern of industrial and inventory cycles since the Great Recession. According to Bank Sarasin, the hope is that the momentum of the emerging markets will partially counteract the fiscal brake in the industrialised countries.
“After the cyclical peak in the second quarter of 2013, we expect a renewed global economic slowdown until the end of the year. Keynes‘“paradox of thrift” will therefore become the focus of discussion towards the end of 2013,” Jan Amrit Poser, Head of Research and Chief Economist at Bank Sarasin, said.
“Investors’ search for income, which has become sparse in the bond sector, is driving them into dividend-paying stocks. Rather than re-allocation to equities, we expect a continuous rotation within equities into high-growth, top-quality companies,” Philipp E. Baertschi, Chief Strategist at Bank Sarasin, added.
The monetary policy of the main central banks will remain extremely expansive in 2013 as well. This will keep yields at the long end of the curve at a low level. If the upturn in the housing market that has started in the USA spreads to the industrial sector, it is quite possible that 10-year US interest rates will rise above 2% again for the first time since last April. The slowdown of the global economy and fears that the euro debt crisis could make a comeback in the second half of the year will send yields back to their current level. New euro debt worries will help German Bunds in particular, because they occupy a special position even among the safe havens.
The nascent revival in the global economy has already led to a powerful appreciation of cyclical currencies. The global economic recovery is also expected to strengthen the euro against the US dollar. However, the window of opportunity for cyclical currencies could close any time in 2013. If economic headwinds put in an appearance, the European debt crisis could return to the limelight. If the financial markets were disillusioned by this, the US dollar would appreciate against the euro. The SNB would also expect another rush into the Swiss franc. The Japanese yen stands to profit the most from the strong demand for safe havens in the second half of the year.
Many investors were favourably surprised by the markets’ performance in 2012. Overall Bank Sarasin expects the key equity indices to rally once more in the first half of 2013, but to finish the year lower than January’s levels. The trend towards stable dividend stocks is likely to continue. The outlook for emerging market stocks is particularly good in 2013, as China is likely to spring a positive growth surprise. Overall Bank Sarasin thinks cyclical sectors hold out the promise of higher returns in the first half of 2013. Industrials, technology shares and insurance stocks offer the greatest potential. In Europe, Germany is still the most promising country, as it has the best-positioned companies.
In selecting favourites for 2013, Bank Sarasin sticks to its tried and tested selection criteria. The selection includes a number of stocks that should receive an additional boost from significant economic and political decisions. These include Roche, for example, whose new products should more than compensate for the loss of earnings due to expiring patents. Various sectors will benefit from the avoidance of the fiscal cliff in the USA. The Dutch retailer Ahold is one such beneficiary, given that a large percentage of its sales come from the USA. The gradual overcoming of the debt crisis in the Eurozone is likely to help SAP and Deutsche Post, companies that are strongly rooted in Europe. Partners Group, an investment management firm specialising in unlisted investments, is extremely successful in those areas of business where banks are no longer able to operate profitably because of tighter capital requirements.