Private banking

2013 – the year of recovery?

After a tough few years, the investment outlook is looking brighter. But will 2013 be the year of wholesale recovery? Kim March, economist and strategist at Societe Generale Private Banking, gives her view.

2013 – the year of recovery?

There’s been lots of talk that 2013 will be the year of sustained global recovery. What’s your view on this and what is SGPB’s strategic vision for 2013?

Things are looking better, thanks to some positive moves in 2012. We saw a lot of tail risks reduced by policy actions such as the introduction of long-term refinancing operations and outright monetary transactions in the eurozone, which reduced the risk of bank default and have helped ease financial strains both on sovereigns and financials. There’s also open-ended QE in the US, for now. That said, the eurozone is still in recession and this will continue into 2013, at least through the first half of the year. In the US, we expect some caution following the recent fiscal deal. But the outlook for the US is better than the eurozone. We expect the US economy to pick up in the second half of the year, the expected resolution of the fiscal cliff enabling people, and companies, to have more clarity in their investment vision. The expectation is that less uncertainty will lead to greater investment. Elsewhere, China had a tough year in 2012, but it is rebounding and we expect this to continue, with GDP growth forecast to be above 8% in 2013. I’m also more positive on other emerging markets, particularly equities, but also corporate and local debt.

Overall, we expect some uncertainty in the first half globally, but things will begin to improve in the second half. The eurozone problems could flare back up, but we see a more balanced risk profile in 2013, certainly compared with 2012. As for our strategic vision for 2013, when it comes to asset allocation we’re looking much more at equities, rather than debt.

You sound more optimistic about Europe. Is the euro crisis effectively over?

The worst is perhaps behind us, thanks to moves like the long-term refinancing operation and OMT. That said, it still might be necessary for Spain to ask for official assistance, as government growth and budget forecasts look too optimistic, even despite the fact that bond yields have fallen without a bailout. Overall, the growth outlook for the eurozone remains pretty tough and the austerity that’s been in place has run counter to boosting the region’s growth prospects. At the very best, there might be some signs of tentative economic growth
during the second half of 2013. However, we are more positive on the eurozone compared to 2012. As the authorities have shown, they do eventually address problems. This will continue going forward – when the going gets tough, the authorities will react positively. They don’t want to see a break-up of the eurozone, even though they have been slow to take action.

What will happen to the Brics in 2013, given their slowdown last year? Where are the bright sparks globally?

As I said earlier, I expect a pickup of growth in China. Or, at the very least, the prospects of a hard landing have been pushed off the table. Brazil is likely to be the biggest emerging markets outperformer in 2013 compared to 2012 – but that’s because 2012 was so bad for the country. Economic growth in Brazil could be closer to 3.5% this year, versus only 1% last year. There is still room for some inflationary pressure in Brazil – it’s already above ideal levels. The government is going to have to keep an eye on that, especially as it continues to keep its currency, the real, at such a low level against the dollar. That said, the government seems comfortable with where the real is trading now (BRL2.05/USD). The government is trying to encourage investments in infrastructure. But it’s also showing signs of meddling, which is off-putting to the private sector and this is discouraging the private sector from investing. So the government needs to address this by restoring private sector confidence. This year will be pivotal.

In India, the worst of the policy paralysis is over and the market is taking a more positive view of the country. But global factors can still have a big impact on India’s economic success.

Russia is experiencing headwinds and we aren’t seeing as strong growth there, nor are we expecting that will change soon.

Outside the Brics, there’s a very interesting story emerging. We’re seeing more being done regarding investments in non-Bric countries. Mexico is one of my favourites for 2013 – there’s a new government and it is showing probably one of the best signs of breaking gridlock and moving forward with possible fiscal reform. Although Mexico still remains very tied to US activity, it showed in 2012 that it has its own domestic drivers.

Colombia and Peru are also bright spots, with both economies growing well on solid domestic demand activity. Turkey is also looking good. It was upgraded by Fitch to investment grade earlier this year, increasing its attractiveness to foreign investors. Growth in Turkey is expected to rise significantly this year on a recovery of domestic demand and increase of exports – Turkey has diversified exports, with less dependence on the EU and more in the MENA region.

Also, looking at the frontier markets, these could offer some good opportunities.
These are countries that normally wouldn’t be able to access international capital markets so well, but many were able to do so last year. There are risks – and yes, there is low market capitalisation but this is similar to other emerging markets in the 1990s. GDP per capital in the frontier markets is less than $2,000, whereas traditional EMs have risen from that same level 20 years ago to $7,000 today. There’s a lot of room for catch up.

Are investors about to renew their love affair with equities as they drop government debt?

We think there’s room for money to change sides, but don’t think they’ll do so yet. The highest gap on record between fixed income and equities was reported last year so we could see some reversal in 2013. Sovereign bonds have been considered safe havens, but we could see government debt start to suffer this year. Overall, we think there will be some rotation into equities this year – but not as much as some are saying.

There’s been a lot of talk about the ‘new normal’. What’s your take on this?

There’s clearly been a shift away from the ‘old normal’ – less regulation, more borrowing, more growth – towards the ‘new normal’, which is low growth, more regulation and less globalisation. But whether this will continue remains unclear. The previous credit-fueled growth doesn’t look likely to resume, in any case, not at the same extent. I think there is increased room for uncertainty going forward.

What are your top tips for 2013 for family offices?

Take a closer look at global emerging markets. A lot of people I’ve spoken to are worried about the risks – and FX risk in particular. But on the fixed income side, a lot of emerging market risk is actually dollar risk. So it’s possible to invest in EM without taking on FX risk. We also see opportunities in EM equities, given better growth prospects in 2013 and still ample global liquidity.