Second half of 2013 sees performance ‘role reversals’

This article is part of
Near-Term Market Trends - December 2013

In spite of some wobbles in the global markets, such as the ongoing fiscal issues in the US, risk appetite has started to surge in the second half of 2013, boosted by buoyant markets.

Of the main regional stockmarket indices, the best performing for the year to November 28 2013 has been Japan’s Nikkei 225 with a return of 32.25 per cent in sterling terms. This has outperformed the UK, US, Europe and emerging markets as prime minister Shinzo Abe’s ‘Three Arrows’ policy appears to be well under way.

This year has seen a number of role reversals in terms of performance, as not only has Japan started to move away from its ‘lost decades’ of poor performance, but Europe is also seeing signs of light at the end of the tunnel. The MSCI Europe ex UK sitting just behind the Nikkei 225 with a 12-month return of 28.54 per cent. Minimal political upheaval, including the stability gained from Angela Merkel remaining in power in Germany, combined with the European Central Bank’s continued supportive stance on monetary policy has quietened the situation.

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However, while equity markets have performed well in 2013, with asset prices performing in line with their expectations, Towers Watson notes in its Global Markets Overview: “While we think there is still modest risk adjusted value in being overweight equities relative to government bonds, our ratings for global equities and, to a lesser degree, government bonds are now close to the threshold at which they would move to neutral. We recommend that investors that are overweight equities relative to their strategic benchmark take their profits on that position and move back to their benchmark.”

Outside Europe, the emerging markets have had the toughest time in 2013, with the MSCI Emerging Markets index producing a one-year return of just 2.33 per cent in sterling terms, well below the results of recent years as higher inflation, wage growth and clampdowns by governments eager not to repeat the mistakes of the west have contributed to a slowdown.

Figures from the Organisation for Economic Co-operation and Development’s latest economic outlook are more positive, with GDP growth predicted to improve in China, India and Russia in 2014 and 2015, while Brazil is predicted to slow next year before picking up again in 2015 – although with the football World Cup and Olympics both due to be hosted by the country in the next few years, this could easily affect GDP growth in the near term.

Meanwhile, in terms of where investors have been putting their money, the top-10 bestselling sectors in September were a mixed bag. Income and a cautious outlook was highlighted by flows into the top two sectors – UK Equity Income and Mixed Investment 20-60 per cent shares – yet other areas finding favour with investors included Targeted Absolute Return, Property, Europe ex UK and, perhaps most surprisingly, Global Emerging Markets.

However, the most popular asset class in September was the IMA UK Equity Income sector, before the frenzy in the sector sparked by the announcement that Neil Woodford is leaving Invesco Perpetual in April 2014.