Following all of the events that have had an impact on financial markets in the last few months, I thought that it might be helpful to offer my thoughts on where I believe we are now, and how it looks set to influence our thinking on investment issues in the weeks and months ahead.
Equity markets rallied during the final months of 2012 and into the start of 2013, prompted by a growing feeling that the global outlook for companies is continuing to slowly improve after a number of difficult years. Particular factors at work include indications that, in structural terms, the Eurozone countries are slowly putting in place the building blocks necessary to create a more stable currency. Continuing growth in the USA looks more likely (aided by the so called ‘fiscal cliff’ deal, although we will hear more on US budgetary issues for a long time yet to come). We are seeing more encouraging data from China and elsewhere in the Far East, and there are expectations of easier monetary policy in Japan, following the change of government. The latest manufacturing data from the UK is pointing to at least modest growth in that sector whilst unemployment continues to fall back. Furthermore, we may begin to see less pressure on global energy prices over the next few years as supplies are becoming available as a result of a sometimes controversial process known as “fracking”, particularly in the USA.
On the negative side, of course, many issues still remain and, despite progress made, Eurozone problems will clearly remain with us and the US budget will continue as a concern. In the UK, the gap between government income on the one hand, and spending on the other, remains too high while GDP growth will not be strong this year.
Our conclusion from all of this is that interest rates are set to remain low during the course of 2013 and beyond, providing a supporting influence for levels of economic activity and company profits. I continue to hold the view that equity investment remains promising and that holding excess cash reserves insures loss of real value after allowing for inflation and of course taxation levied on mediocre rates of interest. I concur entirely with the Bank of England that inflation levels will remain above target for most of this coming year, and consider it possible that the value of fixed interest investments, particularly where income is withdrawn, may begin to come under pressure in anticipation of eventual interest rate rises and as fixed interest begins to lose some of its ‘flight to quality’ attraction.
Bringing all this together, I take the view that, in general, portfolios should be well up to weight in terms of equity allocations. This includes both UK and global funds (in this context, it is worth remembering that by far the bulk of the turnover and profit of leading UK companies is derived from their overseas activities), while the equity field can also offer income opportunities which broadly match some of those available from fixed interest but with the added opportunity of potential for income growth, as an inflation hedge over time, in a way that conventional fixed interest investment does not provide. I am also minded to maintain, and possibly build on, index linked investment as a further long term inflation hedge.
Our view on fixed interest investment is that while no major change of direction is called for at this stage, there may be a case for some rebalancing of portfolios where fixed interest exposure is excessive. This is an area to which I will be giving considerable thought during the coming months and it is my intention to write to our clients whose portfolios have a high fixed interest content during the course of the next few weeks.
I do hope that this brief summary is helpful to you and if you have any questions regarding its content, please do not hesitate to contact me and I will be happy to discuss these with you in greater detail. In the meantime, may I take this opportunity to wish you all a very happy New Year!