The 2013 annual Global Outlook by Russell Investments dated January 2013 provides a very understandable and logical perspective of the equity markets for the coming year. Russell believes the new year will be volatile more or less depending upon external events, like the U.S. debt ceiling, continuing problems in the Euro zone, lower-yielding securities, and minimal inflation. The latter will benefit the stock market as low-yielding bonds and safe-haven investments will cause investors to seek higher returns elsewhere.
Russell predicts a 2% to 2.5% growth rate in the U.S. Of course, falling off one or more of the remaining fiscal cliffs could dramatically impact growth. Inflation will be “tepid,” in the 1.9% range for the medium-term and not impacted to a great degree by continued monetary easing by the Federal Reserve.
Volatility in the stock market will continue as political intrigue in the U.S. and elsewhere continues. A yo-yo risk on/risk off scenario will exist for the foreseeable future in which investment fundamentals are trumped by world events.
China remains a huge element in the expectations for 2013. The economic situation has bottomed out and the country is poised to experience a cyclical rebound. Global economic improvements could very well be influenced by a Chinese/U.S. growth spurt. The economic power of over one billion consumers in China cannot be overestimated.
Asset choices are key in 2013. Differentiated returns will occur across asset classes and regions “against a back-drop of event-generated volatility.” It will be a challenging environment for long-term goals. Safe havens such as cash investments and Treasuries just may result in negative inflation-adjusted yields.
Active management, global diversification, multi-asset investments in the current environment will result in the best performance as “every basis point still counts.” Russell encourages that investors employ professional managers, an obvious ploy to generate business for its own employees.
What about the average investor and those with assets in pension funds? Frankly, none of these people should expect anything other than single digit returns at best in 2013 assuming assets are professionally managed. One off investments by investors are not likely to increase yields unless they are lucky guesses. The year 2013 will be one of wealth preservation. If an investor beats the inflation rate, it will be an acceptable outcome.
However, stocks in general may be the best bet. Moving out of defensive assets such as Treasuries and cash into a diversified stock portfolio would be a logical choice at this time. Everyone is going to be looking for more yield — pension funds, retirees, and average investors alike— so there could be upward pressure on the stock market.
Warning: Average investors will be better served by investing with respected professional than trying to “beat the market.” Also, the stock market is more risky than Treasuries and cash investments, so there is a chance the stock market could be unkind.
Good luck in 2013. You will need some to outperform the indices.