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2013: an important turning point

13 December 2012, VEB.net

If we are to believe what we read, the world is full of gloom and woe. But believing everything you read is not something that investors need to do. They need to analyse the situation themselves and then draw their own conclusions. And these conclusions indicate that it is time to prepare for recovering stock markets and falling bond prices, argues Victor Zwart.

The material that appears in the press each day is written by reporters. They report on the basis of what they understand from experts. Something positive can appear on Monday and then on Tuesday the same subject will be reported in a negative light. For the reporter the content (or its direction) is irrelevant; it is only the news element that counts. The wide range of media available means that investors can find it hard to develop a well-grounded vision on their own. Rising and falling equity prices are a matter of feel. In the short term this feeling is primarily determined by the news of the day or the most recent developments. Over a longer term the direction of equity price movements is (luckily) still always determined by economic developments and business performance; in particular, expectations play a major role here.

The quest

A good investor is primarily seeking signals that may herald a change in the current economic climate. With a growing number of positive or negative signals, decisions can then be taken, for example to change the weighting of equities in a portfolio. At present we find ourselves at a time where bad news seems omnipresent. Not particularly surprising in itself since both Japan and the euro zone are in a recession. For the latter, the result is (still) rising unemployment, which is undermining confidence to a great extent. Various indicators including industrial production and retail sales are showing negative growth. In Brazil, the largest economy in Latin America, economic growth has now fallen back to practically 0%. In short, predominantly bad news. By analysing world-wide macro-economic developments in a consistent and disciplined way, however we can see a growing number of positive signals. Thus, growth of nearly 4 per cent is expected for Brazil in 2013. Looking further, in the USA and China, which together account for a third of the global economy, we can see still more indicators which suggest a positive picture. In the USA there are positive signals from the housing market and a consistent increase in credit. Still more important is that this means that consumer confidence for the first time in nearly five years has hit a new high. When we consider that 70% of the US economy is accounted for by consumer spending, this is a very important development. The stock markets have not yet factored this positive news into prices. Even the high-performing DAX and S&P500 are at a standstill or falling. Other markets have fallen in response to company results for Q3, even though these are better than anticipated. However, with a further increase in positive signals, a moment is sure to come when the markets will start to rise again. And it is very likely that this moment will be in 2013.

Precautions

Since nobody knows when exactly this turning point will be, investors should take a phased approach in order to ensure that their portfolio is ready to take best advantage from the coming recovery. The current low equity prices offer a very attractive purchasing opportunity. Also take account of the possibility of a wave of sales of bonds: investors (and pension funds) have had quite enough of their returns on safe bonds not which fail even to keep up with inflation. To anticipate a possible recovery in the stock markets takes nerve and decisiveness. Anyone who invests via an asset manager would be well advised to ask them about the times to make decisions and their results over the last ten years. These can show whether decisions can actually be expected at all.


Macroeconomics


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