2013: Union Investment’s outlook positive despite crisis

Germany’s Union Investment’s prognosis for the coming year is positive despite the European debt crisis and growing financial repression worldwide.

Jens Wilhelm, responsible for investment strategy on Union’s board of managing directors, says economic conditions have improved significantly compared with early 2012.

But the coming year does not promise a rise in interest rates, so risk averse investors will eventually be forced to take on more risks.

“Relatively safe investments are…ultimately loss-making in real terms, a fact that investors are also gradually realising,” Wilhelm says.

As a result, he expects a “major shift” to investments with greater upside potential as soon as next year. Demand for equities will soar particularly, driving up prices. He thinks equity prices could easily increase by 7%-10%.

His arguments in favour of equities are: the healthy state of companies, their historically low debt levels and their substantial cash holdings. He points to high dividend payments from good quality businesses.

Valuations also have a long way to go to reach their pre-crisis levels of 15-16 price/earnings ratios globally. Currently they stand at 12 globally and 10 in Europe and Germany.

Wilhelm sees most upside potential in emerging markets, where growth is stronger than in the developed world. This region will provide opportunities for investors to pick up yield on both equities and bonds.

Although he expects the global economy to continue growing more slowly next year than in the past, emerging countries like China can show growth figures above 8%. This is significantly better than the predicted “weak and vulnerable global growth trajectory of 3% to 3.5%.”

Wilhelm forecasts growth of 2.2% in the US and expects the Euro zone to stabilise at around 0.2%. This means inflation is not a pressing concern for the coming year, he says.

This conclusion is also underpinned by the actions of the European Central Bank and other major banks in Europe.

“From the beginning of 2013, the banks will actually have the opportunity to repay the liquidity injected by the ECB, and they are in fact expected to do so in the core euro zone countries,” Wilhelm says.

Although there is no short-term inflation risk, Wilhelm still suggests incorporating stabilising components into investment portfolios. His top choice are open-ended real estate funds.

Although these fund in Germany have suffered from negative press and regulatory concerns over the past year, Wilhelm thinks they still offer investors relatively consistent, high returns. Demand for property, too, is unlikely to diminish in the coming year.

Wilhelm concludes that systemic risks are now off the agenda for the time being, although the crises around the world are far from over.

Some asset managers globally share his positive view for the coming year, but it is not reflected in investment appetites. A majority of investors still remain relatively risk averse.

A recent survey of European family offices by Campden Wealth has revealed disappointing returns across the board compared to the previous year.

As a result, focus is shifting to wealth preservation instead of growth, which is not supportive of risk assets.

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