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Apocalypse-free predictions for 2013

Publication Date : 29-12-2012

 

According to one interpretation of an ancient calendar, the Mayans predicted that the world would come to an end on Dec 21, 2012.

The fact that you are reading this today proves that their prediction was not quite accurate. In the past year, many market watchers also predicted financial apocalypses, most of them concerning a Greek exit from the euro zone, contagion of European debt problems to Spain and Italy, and the steep slowdown in China's economy. Those apocalypses also failed to materialise and most stock markets are closing the year with impressive gains.

Now that we survived the havoc of 2012, it is time to look forward to 2013. Economic conditions in 2013 seem likely to improve. The IMF projects global GDP growth to recover to 3.6 per cent in 2013 from 3.3 per cent this year.

Emerging economies will remain the main growth engines, with China's GDP growth forecast to improve from 7.8 to 8.2 per cent, India's from 4.9 to 6 per cent, and Brazil's from 1.5 to 4 per cent.

Europe will remain sluggish, but the risk of the collapse of the euro currency bloc has eased due to the introduction of Outright Monetary Transactions (OMT) - whereby the European Central Bank has vowed to intervene in the bond market to put a ceiling on the interest rate paid on bonds issued by the troubled countries - and the establishment of the European Stability Mechanism, a permanent rescue fund for euro-zone members. Liquidity, which is extremely high right now, will continue to rise due to aggressive monetary policy from central banks to support sluggish economies in the developed world.

The US Fed, in its latest asset purchasing programme, is on track to expand its balance sheet by 30 per cent by the end of next year. Japan's newly elected prime minister Shinzo Abe is also pushing the Bank of Japan to expand its quantitative easing (QE) programme.

All in all, economic conditions will remain supportive for stocks. Reduced risk from Europe, and low bond yields coupled with high excess liquidity will force investors to switch from bonds holding to stocks. Stocks are much more reasonably priced than bonds with the price-to-earning ratio at a historically average level while bond yields are at a historical low.

Gold also stands to benefit from the extreme liquidity injection. Central banks will continue to buy the yellow metal to diversify from major currencies which are likely to devalue as a result of aggressive QEs. In addition, improving economic growth in China and India, the world's largest consumers of gold, will also boost demand for gold jewellery.

Risks include the possibility of a credit downgrade for the US following the debt-ceiling deal in the first quarter and political uncertainty in Europe where general elections are scheduled to take place in Italy and Germany in the first and forth quarter respectively. While I only see a small chance of these factors derailing economic recovery next year, these events will certainly create market volatility as they unfold.

Komsorn Prakobphol is wealth manager at TISCO Asset Management.

 

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