MP and former investment analyst John Redwood sets out the investments he expects to perform well in 2013, and reveals where he's put his own money.
2013 will be the year of easy money. Japan has elected a government signed up to printing more yen. The US authorities have made clear their intention to keep the money pedal depressed fully until unemployment falls to 6.5pc. The UK is experimenting with Funding for Lending and the offer of large sums for infrastructure investment, and may resume government bond buying if necessary.
Even the European Central Bank and the EU authorities, under pressure from Germany not to match the rest of the West’s enthusiasm for easier money, has said it will do what it takes. Most now think the ECB will make more cheap money available to distressed banks in the Euro area if needed, which in turn allows those banks to buy more government bonds. The main emerging market economies have been through periods of monetary tightening, with higher interest rates and tougher controls on bank lending, to curb inflation. Most have now succeeded and will relax their grip.
Easy money will not be as easy throughout the West as the authorities would like. This is because parts of the West still have broken banks, with strict regulators demanding that they keep much more cash and capital today than before the bubble burst. As we saw last year, the failure of the banks to send the newly created money onto the productive economy just encourages the authorities to create some more. 2013 is the year when more of this money should get through to activity in the US, the UK and even Japan. The result should be favourable for shares.
The state of the banks fends off the day when all this extra money triggers rapid inflation. It also means that bonds can stay dearer for longer, as the authorities are not yet ready for higher interest rates in the West. However, we think as the year progresses markets may start to ask more questions about the eventual impact of this monetary loosening on inflation. We put in a bit more inflation protection into portfolios in the UK as 2012 drew to a close, and may do more this year if perceptions change as we expect.
Booming China has strong economic prospects, says Mr Redwood
Investors did well from holding corporate bonds in 2012. They have combined the solidity of fixed income with equity like returns. This may continue for longer, as the non-bank companies do not want to borrow large new sums, and the government bond markets are still supported by official intervention. If economies start to expand, and if inflation picks up, these instruments will become less attractive to various investors. We will hold a bit less this year than last, to reflect the good performance already achieved and the lower yields now available.
We like China and the main emerging markets for 2013. They lagged for the first part of 2012 as they fought inflation. Now (Other OTC: NWPN - news) they look poised to expand and to place more emphasis on growing domestic demand. We think the US will remain the best of the West, with technology and energy as leading sectors of continued growth.
We still like property as an investment class. Property made a good recovery in many major centres around the world in 2012. This year may be quieter for property based investment, but the general background of improving growth is helpful to property assets. We primarily invest through Real Estate Investment Trusts with prime portfolios in the leading centres.
John Redwood on his own personal investments for 2013:
I thought markets were too unkind to Chinese shares last year. They worried about a possible hard landing, thought that Chinese growth might stall completely, fretted over weak local authority finances and pondered a property meltdown. Some seemed to think China had to go through it own version of the western credit crunch of a few years ago following its amazing stimulus injected to see it through the bump in the western road.
By the end of the third quarter last year Chinese shares looked cheap by comparison to other major markets. The new regime has taken over relatively smoothly and reaffirmed its commitment to more growth led by an expansion of domestic consumption and higher real incomes. They have got inflation under better control and have more scope to expand credit and cut interest rates if necessary. Growth has slowed but is still good by Western standards. They do have some weak banks but where doesn't? I have added the exchange-traded fund that follows the China 25 Share Index to my savings.
* John Redwood is a former cabinet minister and currently chair of the Investment Committee for Evercore Pan Asset Capital Management.