Long-term investors shouldn’t worry too much about intra-day market movements, though that 2013 has begun with the FTSE 100 over 6,000 is a welcoming sign – especially with our politicians using their New Year messages to warn of greater economic challenges to come.
2012 was undoubtedly the year of the bond fund – in terms of inflows, if not necessarily performance – though more recent indications from the IMA in the UK, and sources looking across Europe, suggest that investors have been taking on more equity risk.
We should all expect that it’s not going to be a smooth ride for risk assets this year, but what could derail markets?
Grey swans
For Moz Afzal, chief investment officer at EFG Asset Management, there are several “grey swans” to consider – these he says are like Nassim Taleb’s now famous unexpected ‘black swan’ events, but do contain elements of predictability.
These include continued geopolitical tensions in the Middle East, and also between China and Japan where a territorial dispute has seen a break down in trade relations.
The US economy also threatens to continue to hog the limelight in 2013, particularly the budget deficit – fresh from the fiscal cliff deal, ratings agencies Moody’s and Standard and Poor’s have both called upon the US government to get its house in order.
Then of course there is the eurozone, which still has its major problems despite a relative drop off in news flow coming from the region.
And what about the positive news that might prop up markets? Afzal points ECB President Mario Draghi’s assertion that he would do “whatever it takes” to maintain the euro as a defining moment in bringing some degree of calm across the continent in late 2012, and indications are that the appointment of Mark Carney as the new Governor of The Bank of England has been met as a positive development, in the UK at least.
A hard landing?
Of course, the dynamic of the global economy has shifted noticeably in recent years, and any major slowdown in China and the wider emerging markets could impact UK investors more than they might expect, especially given the overseas earnings tilt of our largest listed companies.
China’s new leaders haven’t had a fiscal cliff to contend with, but that doesn’t necessarily mean the country is guaranteed to avoid facing its own hard landing.
