Between Japan’s renaissance and China’s slackening growth rate, the US’s economic recovery and inevitable end of easy money, the first half of 2013 has been anything but uneventful.
Looking ahead, some would argue that investors should expect both an increasing divergence in asset returns as well as a broader and more diverse range of risks.
Distorted markets are resetting but could overshoot while risks are increasing, including a potential emerging market funding crunch and spike in real interest rates warns Ewen Cameron Watt, chief investment strategist at the BlackRock Investment Institute. He adds: “We are approaching a fork in the road for global monetary policy and have had a rehearsal of the impact on markets.”
Below we ask the advisers and fund pickers what their hopes and concerns are for the second half of 2013.
Adrian Lowcock, senior investment manager, Hargreaves Lansdown
“The big issues include China’s shadow banking system. No one knows how serious the problem is and concerns have been rising following restrictions being placed on Chinese media on reporting stories regarding it. Should it spread into a full blown credit crunch we could see Chinese growth come off and it would have a huge impact on the global recovery. However I expect this to be managed away slowly but effectively by China.
“Within the Eurozone, Italy is the country that matters. Any weakness in Italy could trigger a correction in market and a return to 2011/12 days of constant uncertainty surrounding the euro. Europe has gone away for now but could quickly return to centre stage.
“Actually the shock that might happen this year is that no crisis derails markets and in fact the recovery gains strength. But that would be unusual for investors given how markets have been behaving in recent years.”
Martin Bamford, managing director, Informed Choice
“I think markets will remain jittery in the second half, waiting for further indications about the end to easy money. We should also start to see the strengthening global economy play a bigger role in investor sentiment, as we start the potentially painful process of rebalancing from markets fuelled by QE to markets sustained by economic growth
“Our biggest concerns as a business in the second half of the year are based mainly around cost and distractions. We worry that the cost of compensating investors in failed investment schemes including Arch Cru will become an unaffordable burden on the sector, as the consumer redress scheme reaches its conclusion and liabilities inevitably fall on the FSCS. Declining numbers in the intermediary sector mean fewer of us will be around to cover these levies.
“Dealing with product providers who have failed to keep pace with regulatory change remains a real challenge and something that takes up a disproportionate amount of time.”
Ben Yearsley, head of investment research, Charles Stanley Direct
“I am hoping for a quiet second half of 2013 with no sovereign debt crises, no shocks and no wobbles but that probably will not happen. Will it be a surprise if there are more problems in Europe? No, but I am not sure where they will be, it could be Greece, Portugal, Spain or maybe even France.
“The economic recovery in the UK is trundling along in an okay manner and this is what is probably needed, as anything stronger will probably worry the MPC. In the US the recovery is further ahead and although I do not expect rate increases, it will happen sooner there than here. However the continuing recovery in the US will lead to continued dollar strength.
“One thing politicians on both sides of the Atlantic have not got to grips with is unlicensed sector borrowing. In the US at least a reasonable level of economic growth is helping to neutralise the problem. However the simple fact is most governments are still spending too much money and very little is being done to sort the problem out.
“In terms of markets, we had a wobble or even a correction in June as the market got close to hitting 7,000 then fell back to touch almost 6,000. Markets since then have recovered their poise slightly but it would not surprise me to see another correction or buying opportunity later in the year. Japan could be the interesting one to watch as the market has had a strong run up in the anticipation of Abenomics working. As we move more into 2013 and 2014 we will start to see whether those policies are actually working. If they are, the Japanese market bull run could well continue.”
Patrick Connolly head of communications Chase de Vere
”We would like to see a sustained period with no major shocks as the UK economy gradually improves. In the US, Bernanke will aim to gently manage expectations about the future withdrawal of QE while trying to avoid any financial instability. While in the UK, Carney seems to favour using guidance to help stimulate the economy rather than additional QE. However, neither will pull back on support unless they remain confident their economies can stand on their own two feet.
“Inflation in the UK might fall back a little in the second half of the year but there is still a real danger that long term inflationary risks are being underestimated. If there are any major shocks then these might come from Europe. While the problems in the Eurozone are no longer hitting the headlines on a daily basis, it would be a mistake to think the issues there will be resolved in the short term. There will undoubtedly be more bad news to come at some point
“Equity markets have performed very strongly in the first half of 2013, with the exception of the Emerging Markets. Only the most optimistic of investors will expect the same level of returns in the second half of the year and it would be no surprise if markets pulled back a bit.”
Peter Chadborn, adviser and director at Plan Money:
“My biggest concern is inflation because its impact is so often underestimated by clients when undertaking long-term investment planning, such as for retirement. With so much focus within the investment industry on small basis point charging differentials we can easily be distracted by aspects which have marginal effect in relation to the impact of rising inflation. I am most hopeful for a rebound in the mining sector. For many investors this sector was right as a diversification position and remains so, albeit now for a longer-term view.”