ING IM outlook for 2013 suggests growth subject to volatility

A plethora of macro factors pulling in different directions will make 2013 another year when risk-averse investors could miss out on potential upsides, according to the latest annual outlook from ING Investment Management.

Valentijn van Niewenhhuijzen, head of Strategy at ING IM, speaking at the manager’s Annual Outlook Conference in London, identified a number of such factors, including the effects of monetary easing being undone by fiscal austerity, volatility serving up investment opportunities, but leaving the global economy susceptible to shocks, and within certain economies factors such as US employment figures improving, but amidst declining capital spending by US companies.

Meanwhile, investor confidence remains low, such that even if there are improvements seen through 2013, there is a real risk that they miss out on the upside because they remain invested more to avoid downside risk.

Van Niewenhuijzen said that results of ING IM’s recent institutional investor survey pointed to a sum of all major investor concerns – tail risk, eurozone collapse, US and/or China slowdown, black swan events, and regulation – in excess of 200%, which suggested that investors are seeing more risk than is actually in the market.

The global economy “will not be materially different from this year,” particularly because of “the wall of austerity” still facing economies, van Niewenhuijzen said.
OECD GDP levels are back to where they were pre-crisis, but significantly behind where they could be had GDP not slumped so spectacularly following the 2008 financial crisis.

Private sector balance sheets are improved compared to the last time the global economy faced headwinds in 2008, but the effects of this are being undone by significant fiscal tightening, and public sector balance sheets remain challenging. This has also caused behavioural shifts, for example, in the US where the looming fiscal cliff and ongoing deficit has been matched by a sharp increase in the savings rate. But this is causing other problems.

“If everybody is saving at the same time the only result is downward pressure on the economy.” van Niewenhuijzen said.

Another contradition that investors struggle with involves inflation – or rather, the continued lack of it. Considering the commitments to quantitative easing, it is “remarkable” that inflation has not appeared in any aggressive form. However, that has not stopped investors from fearing the effects of inflation, even if it remains low, van Niewenhuijzen said

He said there were no indications currently that inflation would be significantly higher next year. Rather, with so much focus on reducing debt – deleveraging – it may remain difficult to generate inflation because, for example, spare capacity remained high within economies.

Similarly, with interest rates already around zero, it is hard to stimulate expenditure by lowering rates. And fiscal stimulus is conspicuous by its absence, driven by the austerity programmes being followed by many governments.

There are positive indicators, such as the fact that funding costs for residential property in the US are at their lowest for a couple of decades, and banks increasingly no longer have to write down the value of their residential property assets. And if the US housing market kick-started the global financial crisis, then perhaps it could kick-start the recovery, van Niewenhuijzen said.

In mind of the its general conclusion that volatility will remain along with suseptibility to shocks in the global economy, ING IM has updated its asset allocation outlook.

Its favoured asset class is equities, as compared to treasuries, real estate and commodities.

Within equities, however, it is more keen on those stocks that may be able to take advantage of some faster growth in markets such as China – which it believes will have a soft landing – or areas with some cyclical potential. Thus it favours equity sectors such as materials and financials rather than defensives such as utilties and telecoms.

Europe scores well in ING IM’s outlook as a region, partly because of the potential for recovery now in place. The ECB has finally proved it is not a clone of Germany’s central bank, while adjustments ongoing in peripheral eurozone countries could yet provide some upside.

Within commodities, the manager prefers industrial metals.

 

Top Down TAA (range -4 to +4)
Equity 3
Treasuries -2
Real estate 1
Commodities -1
   
Fixed income allocation  
Linkers vs cash 0
Spread 1
Investment grade 0
High yield -1
EMD HC -1
EMD LC 2
AAA ABS 0
   
Equity allocation  
Consumer discretionaries 1
Consumer staples -2
Energy 0
Finance 2
Health care -1
Industrials 0
IT 0
Materials 2
Telecom -1
Utilities -1
USA -1
Europe 2
Japan 0
Developed Asia 1
EM 0
   
Commodities allocation  
Energy 0
Industrial metals 1
Precious metals 0
Agriculture 0
Live stock 0
   
Real estate allocation  
USA 0
EMU 1
UK 0
Japan 0
EMU 0

 

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