2013: bad year for large caps, says Saxo Bank

Investors should stay away from large cap equities in view of the market volatility going into 2013, says Saxo Bank.

A company must be small, but effective, says Igor Dombrovan, chief operations officer at Saxo Bank’s representative office in Moscow. He advises to stay away from larger companies, where the income is much more dependent on global economics than their smaller peers.

He says: “Among smaller companies, we would suggest looking for innovative ones. These can be found in the alternative energy sector in particular.”

This is especially relevant for the US, because most of the innovations that we take for granted now have come from the American army, Dombrovan adds. These include GPS devices, internet and mobile connections.

“Now, the army is looking to increase energy consumption from alternative sources, and the rest of the world will follow it,” he predicts.

This makes the US an attractive region for investment. Dombrovan sees particular growth potential in US small caps. This is driven especially by US firms increasingly moving their manufacturing from China back to the home turf.

Investment firms like Legg Mason and Schroders agree there are opportunities in US small caps. Legg Mason says American small cap stocks have had a “convincing comeback” since the financial crisis and the asset class still has room for positive improvement.

Wages in China have been growing recently and the coming year has all the potential for further wage increases. This is driving many foreign firms, which had set up manufacturing operations in China to cut costs, back to their local markets.

“Wage growth in China is a problem [and this shift] will be bad for Chinese growth,” says Dombrovan.

He sees investors avoiding the BRIC countries in general as they try to keep risks to a minimum. He says: “We are seeing outflows from Russia, India has a demographic problems and China is too risky too. There may be better opportunities in regions such as Africa, but these investments are riskier.”

Dombrovan’s views on the Eurozone are even more downbeat. He describes the European crisis as a huge fire. “[The ECB] is trying to put it out by throwing money at it, but the fundamental reasons for the crisis have not been solved,” he says.

“The main problem is the difference between Northern and Southern Europe. If politicians continue doing what they are doing, Spain will have to ask for help, and Greece will be the first candidate to leave the Eurozone.”

Thus, Europe’s markets do not look attractive for investors trying to protect their money.

Dombrovan sees gold as the best hedge against global uncertainty. He says: “Considering the amount of printed money, we can expect more QE from America by Q1 2013, so it is a good idea to invest in gold.”

He predicts the price of gold can easily reach $2,100 per ounce by the first half of next year.Recently the gold price has been declining and currently stands at $1,695 per ounce.

But the asset class has seen a great deal of demand as investors have sought capital protection. Gold exchange traded funds have been especially popular, with investment in them over the third quarter up by 56% on the previous year, according to the World Gold Council’s Gold Demand Trends Report.

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