iShares’ Steve Cohen outlines three investment scenarios for 2013

Steve Cohen, head of Investment Strategy and Insights EMEA at iShares, says there are three key investment scenarios that could play out through 2013.

Politics and policy will continue to be the key driving forces in financial markets in 2013, with the switch from a focus on systemic risk to growth potential.

Scenario one: The ‘Great Idle’ of below-trend growth, 65% probability

The most probable outlook for 2013 is the ‘Great Idle’, which is where the global economy picks up on 2012 but stays below trend in the face of various deleveraging forces around the world. There is further private sector deleveraging to go, not to mention the fiscal challenges. The backdrop of companies hoarding cash is showing some signs of change but corporate sentiment and confidence – impacted recently by the uncertainty of the US fiscal situation – remain key to any sustainable pick-up in growth. The electoral calendar will be a driver for policy advances – notably German elections in the autumn and Italian elections in the spring.

In this situation, investors may decide to consider the following areas:

• Emerging markets equity and debt: Forecasted for strong growth in 2013 following significant monetary easing in 2012. EM equities remain at a discount to developed equities after 2012 while EM bonds are drawing increasing interest in the backdrop of continued yield compression in developed markets, for their attractive yields, less leverage and improving credit profile

• Minimum volatility equity products: Offer attractive exposure to equities this year in the face of further political uncertainty, often with higher risk-adjusted returns than the parent indices

• Dividend equity products: Income, especially through equities, will remain a theme in 2013 due to their increasing pick-up versus bonds; dividend growth of emerging market companies makes them an important chapter in the dividend story

• Investment grade credit: Continued search for yield in the non-sovereign fixed income space with strong fundamentals

• Gold: Strategic hold in a portfolio as an on-going beneficiary of today’s extraordinary monetary conditions and negative real interest rates at least in the first part of 2013

Scenario two: The ‘Risk of Crisis’, with recession in large developed countries, 20% probability

Although a disorderly Eurozone breakup is less likely compared to this time last year, the chances of a crisis remain, be that in Europe, the US or the Middle East. There remains uncertainty about US fiscal long-term sustainability and the debt ceiling, any failure to reach an agreement would lead to a very real risk of another recession. Risk in the Middle East remains as active as ever, with accompanying potential oil spike, but the probability of such a global crisis event is less than last year.

In this scenario, investors may increase allocation to defensive themes such as dividend equities and minimum volatility equities, and increase their strategic holdings in gold and Treasuries.

Scenario three: ‘Accelerating growth’ with an upside surprise, 15% probability

We see a slightly higher-than-2012 probability of growth accelerating globally if credit creation, specifically in the US, were to surprise on the upside. In this situation, investors may choose to increase allocation to equities, high yield, and reduce exposure to investment grade credit.


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