Funds manager consensus views on 2013 augur well for share markets and sound some caution for bonds, according to the financial adviser licence provider Paragem.
In its outlook note for clients last week, Paragem predicts:
- Interest rates around the world will remain low not just in 2013 but probably for another couple of years after that;
- Australia’s Reserve Bank is likely to cut interest rates again in 2013; the precise amount of any cuts will depend on how conditions unfold, but it is not hard to see another 0.5 per cent of cuts in the coming year;
- As economic activity around the world improves in 2013 and shocks to the global financial system (such as national debt and banking crises) diminish, so the demand for government bonds as a safe haven investment will also diminish;
- We are unlikely to see a big sell-off in government bonds in 2013, but rather a gradual increase in yields; government bonds will be most at risk if and when global interest rates start to increase in a couple of years’ time;
- The demand for yield is likely to continue at least in the first half of 2013 until investors become more confident about opportunities for capital gains in more cyclically-oriented equities;
- This means that some expensive high yield assets are likely to become even more overvalued before they eventually sell off;
- Equity markets should continue to improve in 2013 as investors re-evaluate the prospects for global growth and unwind some of the pessimism left over from 2012;
- Global equities are likely to perform better than Australian equities given our expectations about their relative pace of growth and reform; Australian equities can still rally in the wake of improving global markets;
- the Australian dollar is likely to remain above parity with the US dollar for some time yet; one of the key reasons why the Australian dollar is strong is because the US has been running a deliberate policy of making their currency weak; until the US reverses this policy, the Australian dollar will remain high.
Paragem believes investors should consider using 2013 as an opportunity to re-weight portfolios towards equities, first away from cash and government bonds and then away from higher yield defensive assets. Within equities, investors will favour international markets over Australia, particularly the Asian equity markets.
“Investors should also continue to hedge international assets and enjoy a positive, albeit shrinkig, interest rate premium while avoiding the cost of an appreciating exchange rate,” the firm says.