Delphi’s Stig Tønder sees Europe, US, emerging markets as key themes in 2013

Stig Tønder, manager of Delphi Global, picks out the key themes that could make 2013 a good year for equities.

At the beginning of 2013, a number of factors are in favour of shares. The USA and China are showing signs of recovery and Europe is gradually dealing with its challenges. In addition, with interest rates still low, there are few good alternatives to shares, writes Stig Tønder, the manager of Delphi Global.

In light of the macro unrest that ruled last year, the return on the global stock markets was surprisingly good. The upturn is mainly due to many listed companies achieving good results in a challenging year. In addition, some players started to reinvest in the stock markets. We expect this trend to strengthen in 2013.

Too much focus on GDP

The global financial markets were highly volatile throughout 2012. The short-term picture was dominated by debt problems and the way in which the politicians handled these – in many ways a repeat of 2011 but investors were more concerned about global GDP growth than short-term “fire-fighting”. It is difficult to predict future GDP growth and this was definitely no easier than ‘usual’ in 2012. The Chinese economy slowed drastically and the European economy more or less came to a halt, while the USA, a bright spot, experienced moderate growth. Even if the GDP forecasts are more or less correct, there is not necessarily a direct link between GDP growth and stock-market developments year by year. However, there is no doubt that companies’ earnings grow in line with GDP over time, and that share prices rise in keeping with the companies’ earnings over time.

To put it simply, three main macro concerns characterised the stock markets in 2012: the European debt crisis, China’s growth outlook and the US election and fiscal cliff.

Eurozone making important moves

At the start of 2012, we pointed out two important issues that had to be resolved in the eurozone: first of all, the countries that had had unsustainable over-consumption had to put long-term cost-cutting plans in place and combine these with growth initiatives. In addition, we believed that the EU and European Central Bank (ECB) had to provide the capital necessary to keep the interest rates low and that the banks needed to be recapitalised.

Some people say that progress in the eurozone is slow and that no action is taken until the situation is acute – without anything “extra” being done to resolve the underlying problems. At Delphi, we believe that the right moves are being made and that the politicians and central banks could hardly have done any more, given the EU’s current structure. Working one’s way out of major debt problems will always take time.

We believe that the adaptations being implemented in the eurozone are good and correct and that the steps towards a banking union are important. One necessary measure put in place in 2012 was that the ECB allowed national debt to be bought from the countries in crisis. Liquidity and interest levels are crucial factors in this process, and the refinancing cost has fallen, in part considerably, for many of the countries in question. The same has happened to the banks’ financing costs.

In total, the progress in Europe is uplifting, but economic growth is still lacking.

Continued progress in the USA

The US economy achieved moderate growth in 2012 but with steady improvements in the labour and housing markets. US banks have come far in the recapitalisation process. Loan losses are declining and the authorities are once more reducing their shareholdings in companies that received help during the financial crisis. At the same time, the USA is in the midst of an exciting energy revolution, with the production of shale gas and shale oil as its main ingredients. The greatest optimists think the USA may be self-sufficient in oil during the next 10 years.

Towards the end of last year, US politicians strongly disagreed on how to handle the so-called fiscal cliff. The challenge was to reach agreement on the US budget. The implicit threats were automatic budget cuts and tax hikes that would come into force at the year-end and which in the worst case might negatively affect growth in the USA and rest of the world. The fact that some kind of agreement would be reached before the year-end was on the cards. However, the politicians did not quite achieve their goal and the deadline by which some factors had to be agreed on was postponed until the end of February. US stock exchanges are normally viewed as a “safe haven” in times of unrest. As a result, the USA was the biggest individual country in Delphi Global in 2012. We expect the USA share of the fund to decline in future.

Comeback for emerging markets

In China, the fall-off in growth seemed to stabilise towards the end of 2012. We are now seeing a likely soft landing for the Chinese economy, which is one of Europe’s most important trading partners. Its manufacturing production and domestic consumption are increasing and the new leadership wants to continue the reform work. China is doing a difficult and important job in balancing its growth while changing from infrastructure investments to a more consumer-oriented economy. The latter requires, among other things, less private savings, better and cheaper school systems, a social safety net and improved sick-pay schemes.

We also expect a brighter future for the other emerging economies in 2013. Most of these have managed to reduce inflation, thus allowing them to have a more stimulating economic policy, among other things. In addition, emerging economies will be helped by the confidence in a general improvement in the global economy in future, led by the USA and China. If conditions develop in the direction we predict, exposure to emerging economies – both direct and indirect – will comprise a greater share of Delphi’s portfolios in future.

The road ahead….

At the start of 2013, stock exchanges are sensibly priced. Due to the attraction of the interest market over the past few years, institutional investors currently do not own many shares. We expect this situation to change gradually. The large central banks are pursuing an expansive policy and are continuing to increase their balance sheets. Companies are generally in a good condition, with strong balance sheets and high margins. At the same time, the risk level in Europe has fallen as a result of the measures being implemented and this has led to better interest-rate conditions for the South European countries. The banks’ financing has also become easier and cheaper. Last but not least, both China and the USA are showing signs of improvement, while expectations as to the stock market and global economic growth are low. That bodes well for shares in 2013.


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