2013: The new year’s challenge will be to keep inflation at bay, UBP

Faced with a sluggish and stimulus-dependent world economy, central banks have reasserted their will to do all in their power to restore growth and confidence in the markets and the challenge in 2013 will be to sustain the current reflation policies while keeping inflation at bay, according to Alan Mudie, chief investment officer at Union Bancaire Privée.

“In the eurozone, the central bank’s credit stimulus has yet to feed through into the real economy, which does not bode well for consumer spending or investments, the only two factors that can set the economy on a selfsustaining growth path,” he said.

While the effects of the Fed’s measures have recently started to be felt in the US, the world’s leading economy is still on the edge of its so-called fiscal cliff: the combination of drastic spending reductions to alleviate public debt and the expiry of Bush-era tax cuts which could cost the US economy up to 5% of its GDP.

For 2013, UBP thinks equities should continue to be favoured, while maintaining the bank’s all-important focus on high-quality stocks, those of large firms with an international reach, high entry barriers and regular cash flows allowing high and rising dividend payments.

“Another focus is real assets, which are more resilient to and provide more protection from inflation,” UBP said.

More specifically, plays like mining companies and large energy producers are the most likely to benefit from the current monetary policies.

The US real estate sector is also well-positioned to take advantage of the current situation and participate in the economic recovery.

“Eventually, the creeping monetisation of public debt and central bank intervention are by their very nature likely to erode the value of the currency in countries that make the most assiduous use of the printing press; gold is undeniably set to gain from this trend and its price will rise with monetary expansion,” the bank said.

Investors should also steer clear of government bonds and within credit convertible bonds are a good choice: through their convexity they allow the investor to capture equity rises while limiting downside risk, with lower volatility than in pure equities.

Emerging countries still offer stronger fundamentals and their external debt remains attractive for investors.

“Lastly, flexible alternative strategies, which are able to benefit from the reflation-driven equity surge and also to shelter from passing corrections, should be targeted. The environment is also propitious for strategies that focus on distressed debt and on opportunities generated by financial institutions’ deleveraging,” UBP added.

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