Which topics will dominate the investment landscape next year? Robeco analysts Léon Cornelissen and Ronald Doeswijk share their predictions.
1. The US fiscal cliff
The largest risk in the US as 2012 comes to a close is that irresponsible politicians allow the economy to fall off the fiscal cliff.
Yet Robeco chief economist Léon Cornelissen isn’t overly concerned. 'We don’t worry too much about the fiscal cliff,' he says, because he expects a deal to be pushed through before it is too late. 'Some compromise will be found'.
Cornelissen believes that once the fiscal cliff has been by-passed, the US government will try to lower the budget deficit by one percentage point, which would take it to under 6%.
In fact, Cornelissen feels that with the fiscal cliff out of the way, the US economy will surprise on the upside. 'Consensus growth expectations for 2013 will steadily rise to 3%,' he says. That compares with 2% for the whole year now. Moreover, he adds, 'inflation will not be a problem'.
2. No end in sight for eurozone crisis
The eurozone debt crisis has gone off the boil since the ECB announced its new OMT project back in September. But it has not gone away. 'The area will remain in crisis in 2013,' cautions Cornelissen. 'The crisis could easily escalate.'
There is no endgame in sight. For one thing, progress towards a fully integrated fiscal, political and banking union will probably be disappointingly slow.
Despite this deteriorating environment, the ECB is likely to make only marginal policy alterations. The official rate is thus set to be reduced from the current 0.75% to 0.5%, with the deposit rate remaining unchanged.
Given the weak outlook, this cut is likely to take place in December 2012, though it could be delayed into 2013 because headline inflation is still relatively high. Cornelissen says that he expects inflation to fall below 2% in 2013.
3. Cyclical recovery in China to accelerate
Next year is set to see a revitalization of China’s economy. In 2012, the economy is on track to grow at the slowest pace since 1999. The country’s quarterly year-on-year growth rate has slumped from 12% at the start of 2010 to around 7.5% at present.
The good news is that positive data has started to appear. In October, manufacturing expanded for the first time in three months, while retail sales rose the most in six months.
'China is already showing early signs of recovery, as a consequence of the earlier, modest loosening of policy,' says Cornelissen. 'The economy will further strengthen next year.'
The new leadership has a conservative tilt. Cornelissen says that Li Keqiang, the new premier, 'knows his economics' but also describes him as a 'cautious bureaucrat'. No major policy changes are likely. 'Expect more of the same' is his somber conclusion.
4. No more room for earnings growth
It may be that the Q3 2012 earnings season was the high-watermark for earnings. Yes, revenue figures were generally disappointing but earnings were, in most cases, above expectations.
These robust profits can be put down to high margins. These are the result of companies’ reluctance to invest, the low level of borrowing costs and the high level of unemployment, which is holding down labour costs.
What was really telling about the Q3 earnings season was the cautious nature of companies’ forward-looking statements. 'That was no surprise to us, as we believe there is no upward potential for earnings margins,' says chief strategist Ronald Doeswijk. Rather, he expects margins – at best – to stabilize.
But analysts’ outlook for next year still contains an element of wishful thinking. 'The consensus is thus that margins will expand again in 2013. We think that will be hard. Expectations are too optimistic,' he says.
5. Credits, high yield and emerging market debt have best prospects
Why does Doeswijk believe this? The current muddling-through macroeconomic scenario should continue, he says, and that should be a good environment for investment-grade credits and high yield bonds, even after their rally over recent months.
He adds that emerging markets debt is also attractive. 'We believe that the current return drivers for emerging markets debt – mainly the search for yield and the healthy economic fundamentals in these markets – remain firmly anchored,' he says.
Indeed, the 5.7% yield on emerging markets debt provides a much higher return than that available on high-quality government bonds. Doeswijk rates these three riskier forms of bonds equally.