The outlook for equities in 2013 is ‘cautiously positive’, as the US and China stabilises, Europe’s deterioration decelerates and emerging markets achieve solid performance, Schroders experts have advised.

Schroders head of global and international equities Virginie Maisonneuve explained: “As the economy starts to normalise, including interest rates over the next two years, we are positive on the outlook. With equities extremely cheap compared to bonds, we expect companies to arbitrage between the two segments of the financing market to borrow, restructure or suport M&A and investors will start re-allocating to equities after extraordinary profits in bonds.

“Given the US and China have stabilised and will slowly improve in 2013 while Europe’s deterioration decelerates, the scope for global equities to perform in 2013 is, in our view, quite positive. We should not ignore potential volatility in Europe or the Middle East, but given equity valuations, the appeal of increasing exposure to one’s portfolio or pension scheme is strong. Sectors such as industrials and commodities have been undermined by the fear of a global collapse and therefore provide attractive upside potential. Keeping in mind longer-term issues is also essential to position the portfolios adequately for further structural changes as well as betting on companies with superior structural growth, top leadership teams and strong balance sheets.

Focusing on European equities, Schroders head of European equities Rory Bateman claims that there are a wealth of ‘neglected European stars’ that are offering good value as investors remain cautious.

He explained: “Europe houses some of the best companies in the world; market-leading franchises, all too eager to take advantage of demand growth across global markets. For us, there is a wealth of neglected European ‘stars’, which are offering increasingly good value as fearful investors wait in the wings until the dust settles.”

This view has been based on ‘bold’ policy decisions by the ECB, which have been viewed by many as a ‘game changer’ for Europe, reducing the European equity risk premium as the tail risk event of a eurozone break-up diminishes.

However, Bateman warned that good stockpicking will remain crucial if investors are to effectively capitalise on these opportunities. He also expects a protracted recovery and does not imagine that “we will see a dramatic improvement in growth expectations for 2013”.

Looking at emerging market equities for 2013, Schroders head of emerging market equities Allan Conway expects it to be a year of ‘muddling through’ for the asset class.

He explained: “In all likelihood we will get a continuation of the muddling through and more of the same for equity markets. In other words, anaemic developed world economic growth (but much stronger emerging activity), plenty of liquidity, record low interest rates and generally positive equity markets. However, there is likely to be much dispersion of returns between markets, punctuated by periods of tail-risk uncertainty. In terms of the economic outlook, we expect the US to deliver around 2% GDP growth next year, the eurozone to shrink a further 0.3% but GEMs to experience a modest increase in GDP from around 4.7% this year to approximately 5.2% in 2013. More specifically, we expect emerging market equities to deliver solid performance during 2013 and perform even better over the longer term.

“There are several reasons for this. First, taken in isolation, GEMs look extremely attractive in terms of valuations, both absolute and relative to history as well as on a market capitalisation to GDP basis. Second, two of the three most significant headwinds for risk assets in 2012 should begin to fade as we progress through next year. Specifically, Chinese economic growth appears to be responding to the modest easing measures that were implemented earlier this year. We will also have a resolution to the US ‘fiscal cliff’ debate early next year. Our base case is that a compromise will be reached, even if it goes to the wire, and that the fiscal drag next year will be around 1.5% of GDP.

"The one remaining major overhang for markets is the eurozone crisis. In our opinion, this continues to represent the biggest risk for equity markets, including GEMs.”

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