SUMMARY Markets have effectively been rigged this year, and this is likely to continue. Rather than let this upset us, we’ll deal with the hand we have been given, and work to understand how best to work through this uncomfortable environment.
It has been a year of rigged markets. Rigged by central banks, particularly after the ECBs Mario Draghi announced he would do “whatever it takes” to defend the beleaguered currency and avert a seemingly inevitable banking crisis.
Bond markets spiked higher (yields lower), but so did equity markets. Central banks moved all these markets beyond a sensible measure of fair value, with bond yields around 300 year lows, and the US stock market still expensive. Over the weekend even the Bank of International Settlements (a very conservative bunch) was moved to warn that asset prices are out of touch with fundamentals.
This manipulation distracts many investors and analysts, who are insulted that the central banks feel they can manipulate them so easily, and are left on the sidelines debating rather than exploiting areas of genuine good value. This is one of the reasons why hedge funds and high frequency traders dominate stock market volumes, as they are content simply to trade with the trend, whatever the trigger – they are not over-sensitive when there is money to be made!
So as we peer into 2013 and beyond we must play the hand we have.
We must recognize that the central banks have created a kind of stability. It is abizarre stability, one you might feel insults your intelligence, and undoubtedly creates long term risks as they, eventually, try to unwind their action. But, for now, central banks have declared their huge and ongoing commitment to continue to print money or equivalent action.
For 2013 this should mean a continuing contained depression (rather than anything worse). No marked pick-up in inflation, but no deflation. Perhaps a mild recession, but no runaway growth. And stock market indices dominated by large companies will continue to swing around at the mercy of short term bad news (pick from a long list of possibilities) and renewed central bank interventions.
This environment should mean that corporate bonds continue to deliver positive returns, though not as heady as in 2012. UK smaller companies can continue to deliver more growth than larger companies. Cash rich businesses, in the UK and beyond, will be sufficiently confident to continue raising their dividends – good news for those invested into equity income funds.
As an aside…
…bearing in mind the time of year, we’re even more bogged down than usual due to the new regulatory regime (RDR) which comes into place from January. Most of you will already have heard from us on this matter. Feedback from many sources (including you!) is that (while originally well intentioned) it is mostly pointless. Nonetheless we have to get all the right paperwork in place for every client, so thank you to the great majority of clients that have already replied to our recent correspondence.
From all of us, have an enjoyable and peaceful Christmas. We look forward to working with you in 2013.
