2013: Fleming Family & Partners identify winning and losing strategies

Wealth Manager Fleming Family & Partners (FF&P) has picked what it calls five winning and five losing strategies for 2013. Notably, the firm sees opportunities in US mortgaged-backed securities, emerging markets debt and gold.

Chief investment officer Dan Briggs argues that the recent sharp market pull-back after an encouraging summer will give way to further yo-yoing between ‘risk-on’ and ‘risk-off’ market phases in 2013, driven by news flows from Europe, China and the US.

Despite the backdrop of unresolved political and fiscal issues, FF&P believes risk assets can continue to perform well. Although company earnings will fall back from double-digit growth levels, and equity valuations are not at the depressed levels seen in 2008-9, valuations still look attractive in an historical context and when compared to bonds.

According to Briggs, interest rates will stay low and liquidity programmes held on standby for at least another two years.

He comments that policy-makers and governments are likely to adopt an expedient and practicable course which “albeit morally dubious, will strive to reduce debts and fund deficits by inflating away their impact, by maintaining interest rates and bond yields below inflation”.

“Although this will create even more difficulties and hazards for savers and cautious investors, it should, as policy-makers hope, reward judicious risk taking”.

The five likely winning asset classes and strategies for 2013 are :

1. US Mortgage backed securities: The US residential property market is now rebounding from oversold levels with the US Government and the Federal Reserve committed to stimulating the US housing market to underpin a wealth effect. With employment trends likely to improve in 2013 and property values still trading at 75% of cost, US residential-related property is an attractive area.

2. Emerging market debt: We anticipate an inexorable appreciation in emerging market currencies versus developed market currencies, given superior fundamentals. This is despite a historical propensity for emerging market assets to sell off in periods of higher volatility. We increasingly like Russia and Brazil.

3. Emerging Market Equities have underperformed recently given concerns of a global hard landing and a flight to developed market equities. Selectively, we see good opportunities for Asian and Latin American equities to outperform, given superior growth potential and attractive valuations.

4. Gold bullion remains our best hedge against currency debasement as governments implicitly ‘default’ on their obligations by supporting higher inflation. Gold has a long history of tracking prices.

5. Prices of high quality private equity funds stand at attractive valuations relative to stated conservative valuations, reflecting reduced liquidity and the poor market for IPOs.

The five likely losing strategies are:

1. Nominal developed market bonds are expensive, having appreciated excessively due to liquidity programmes and actuarial-driven, institutional purchasing. There are risks that yields may back up sharply if global activity improves.

2. Regulated utility equities represent a potential income trap. Over-leveraged high yielding companies are susceptible to regulatory interference and windfall taxes.

3. Fund of fund hedge fund models will struggle to perform well in the face of high fees and indifferent across-the-board performance for hedge fund strategies.

4. High quality corporate bonds have become expensive relative to high quality income generating equities, with yields driven down by government yields.

5. Listed infrastructure vehicles have performed well but have become too expensive in relation to risks due to demand for safe and assured income.

London-based Fleming Family & Partners was founded in 2000, following the sale of Robert Fleming Holdings to JP Morgan Chase Manhattan. It now manages assets of around £3.7bn and beyond the founding Fleming family looks after an additional 49 core, discretionary clients.


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