The first months of 2013 has seen a continuation, or indeed an acceleration of 2012’s rising equity markets, while the fixed interest sector has not made further progress and in some areas prices have declined a little.
Factors that have had a positive impact on equities include continuing signs of recovery in the world’s largest economy, the USA, while some of the rapidly growing Far Eastern economies continue to evolve and make progress at a rate of which the Western world is generally very envious. Within the European Union on the other hand, growth looks set to be at best very limited in 2013. Against this backdrop, companies are generally performing relatively well, this applying in particular to those with a wide geographical spread of activities.
We are currently well into the annual results season and a number of companies have surprised on the upside, increasing dividends if anything a little more than I had anticipated previously. Furthermore, whilst their observations on current trading and future trends inevitably refer to the mixed global outlook, the underlying tone is one of reasonable confidence. I conclude that equity valuations remain sound, and that worthwhile opportunities for medium and longer term investors remain.
Fixed interest markets I view in a rather different light as although, in general, interest rates look set to remain low for some while to come, they cannot fall much further and as a consequence there is little or no scope for further increases in fixed interest values such as we have seen over the last few years. Therefore, with the exception of index linked holdings (offering a potential hedge against inflation which looks set to continue to damage the real value of savings well in to the future,) returns look set to be restricted to a rate of interest and, particularly where such interest is taxable, the potential benefit to holders looks to be increasingly modest.
Bringing all of this together, I continue to hold a view that for most clients it is appropriate to overweight equity holdings in portfolios at the expense of fixed interest and in particular cash.