This article is part of Morningstar's "Perspectives" series, which is a series of articles written by third-party contributors.
Could 2013 be the first “post-crisis” year for markets? Some signs are very encouraging. Yields on peripheral market debt have fallen sharply following September’s announcement of the Outright Monetary Transactions (OMT) programme by ECB President Mario Draghi. After numerous extreme spikes over the last couple years, the S&P 500 volatility index (VIX) is now below its long-run average. Credit default swaps on European banks have declined to July 2011 levels. The latest (though not last) Greek aid tranche has been distributed.
The risk of a chaotic break-up of the eurozone has clearly receded and not only because of more forceful intervention by eurozone leaders (however tardy). The economic imbalances that precipitated the crisis are also correcting. Italy and Spain are running trade surpluses with the eurozone. Greece’s primary budget (before making interest payments) is in surplus year-to-date.
A more benign environment in Europe will be supported by ongoing liquidity from the US Federal Reserve
A more benign environment in Europe will be supported by ongoing liquidity from the US Federal Reserve. This liquidity will provide support for risk assets generally, but in particular equities (both in the US and emerging markets) and indirectly higher yielding fixed income as investors look to alternatives to investment grade debt for yield.
The recovery that began in China in the first quarter of 2012 should continue, though growth rates will not reach double-digit levels as in the past. This growth will benefit China-dependent markets such as commodities, but also consumer sectors as the government increases its efforts to reorient the economy away from investment and towards household consumption. Other large emerging markets should follow the same pattern.
The world is obviously not without risks, however. Germany Bund yields are still at very low levels, reflecting lingering worries among some investors about the currency union. If Spain were to decide to not to ask for a bailout, or if elections in Italy lead to a government less committed to cutting the budget and reforming the economy, yields could shoot up again. The US fiscal cliff is still a threat, though it is highly unlikely that the spending cuts and tax increases would actually remain in place beyond January as a compromise of some sort is almost inevitable.
Despite these concerns, we believe investors should be moving their assets out of cash and other low yielding assets and into securities offering returns beyond inflation. Equity valuations remain attractive, company earnings continue to grow, and many types of fixed income offer generous yields relative to core sovereign debt.
The original version of this article was written by Dan Morris, a global strategist at J.P. Morgan Asset Management. It was released in an email newsletter on December 10, 2012.
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J.P. Morgan Asset Management
The opinions expressed are those held by Dan Morris at the time of going to print. This document has been produced for information purposes only and as such the views contained herein are not to be taken as an advice or recommendation to buy or sell any investment or interest thereto. Reliance upon information in this material is at the sole discretion of the reader. Any research in this document has been obtained and may have been acted upon by J.P. Morgan Asset Management for its own purpose. The results of such research are being made available as additional information and do not necessarily reflect the views of J.P. Morgan Asset Management. Any forecasts, figures, opinions, statements of financial market trends or investment techniques and strategies expressed are unless otherwise stated, J.P. Morgan Asset Management’s own at the date of this document. They are considered to be reliable at the time of writing, may not necessarily be all-inclusive and are not guaranteed as to accuracy. They may be subject to change without reference or notification to you. Both past performance and yield may not be a reliable guide to future performance and you should be aware that the value of securities and any income arising from them may fluctuate in accordance with market conditions. There is no guarantee that any forecast made will come to pass.
