ECM’s Stephen Zinser outlines expectations for 2013
Stephen Zinser, chief executive officer and co-chief investment officer at ECM, says he is reasonably positive about the prospects for 2013.
Markets shrugged off the looming US fiscal cliff in December and ended the year in a bullish mood. The Fed also concluded the year with a QE 3 programme and a significant policy shift linking rates to several key economic indicators. In Europe, Spanish and Italian government yields continued to drift downwards and the release by the Troika of €34 billion tranche for Greece eliminated the near term risk of a Greek exit from the Euro. This capped the best year for European credit markets since the massive rally in 2009. European investment grade credit markets reported full year 2012 excess returns of 712 bps. Specialist higher beta assets classes did better still – subordinated financials and European high yield registering excess returns of 23% and 18% respectively.
ECM programmes ended the year on a high note. Risks that we prudently added to portfolios beginning in August 2012 paid dividends in full year performance. Most ECM funds ended the year ahead of their respective reference indices and return objectives, achieving high single digit or in some cases low double digit performance. A handful of funds produced solid full year total returns but lagged a reference index principally due to highly cautious positioning at the end of Q2 when Eurozone systemic fears were greatest. Importantly we went into year-end 2012 positioned for a reasonable rally in the credit markets. So although it is still early in the month we are off to a good start this year.
So how do we see the markets and credit investment returns this year? We are actually reasonably positive. Returns will not match the stellar performance in 2012. However the economic cycle, the credit cycle, market technicals and the sharp reduction in Eurozone systemic risks all point to a reasonable year for credit markets albeit with the inevitable bumps on the way. Starting with the economic cycle, we assign an 80% probability in 2013 to a low growth environment. The combined Eurozone is likely to remain in mild recession through the first half of 2013 but stabilise in the second half of the year. Europe’s circumstances may not be good but they look better in 2013 than they did in 2012. The US will clearly do better at circa 2% growth in 2013. China seems to be stabilising, calming last year’s hard landing fears. This low but positive growth environment is what suits credit markets best. A global recession or rapidly accelerating growth each bring different but significant risks to credit markets, but we don’t expect either of these scenarios this year.