Schroders Private Bank: Our three asset class picks for 2013

Schroders Private Bank has highlighted the three areas of the market it expects to outperform this year, pointing to Japan, UK property, and commodities as potential winners.

Robert Farago (pictured), head of asset allocation at Schroders Private Banking, said the outlook for the world economy looks brighter, despite some uncertainty remaining over the stability of financial markets.

“For the first time in three years, there is a realistic possibility of upside surprises,” he said.

Generally, 2013 promises to be a positive environment for equities, said Farago, against a backdrop of stable growth and stable inflation.

“The strong performance in 2012 was driven more by valuation increases than earnings, which lowers return expectations. Analyst expectations for next year’s earnings look too high to us, which is another source of concern. Still, valuations are fair to attractive on most measures and equities continue to offer a higher yield than government bonds.”

Within equities, Japan is the cheapest global market on a price to book ratio, and has been a long-term laggard, according to Farago.

“We see value in a number of companies that are global leaders in many fields, the market is under-owned and, at worst, we think it is highly unlikely that the yen will actually strengthen and put downward pressure on export earnings,” he said.

Meanwhile, Schroders expects UK commercial property to remain stable in the medium term, with returns in line with income yields.

“The London office and retail markets are likely to be the only major areas of strength for some time. In contrast to most previous cycles, the last boom did not lead to a glut of supply,” Farago said.

“High street retail is unattractive due to pressures imposed by the rapid growth in internet shopping. Convenience stores and a few niche markets offering inflation-linked rentals, such as car showrooms, are other markets we view positively.”

Lastly, agricultural commodities could be an area to watch as it is likely to see prices rise, he added. Supply and demand dynamics will be favourable for investors as farmers worldwide struggle to meet rising demand for biofuels.

Broadly, Farago is more optimistic in his outlook for the global macro environment, seeing a hard landing in China as unlikely, an improvement in eurozone current account deficits, and some progress in dealing with the US fiscal cliff.

“The rebound in markets over the last three years has not been driven by a strong economic rebound but instead relief that the many major downside risks have been avoided.

“Today, there is scope for a stable environment to trigger better than expected growth since there is pent up demand in the economy. In particular, the US housing market, whose downturn helped trigger the financial crisis, has started to stabilise and gains are expected next year.”

 

This article was first published on Investment Week

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