Can equities outperform in 2013?
Calendar year 2012 has been good for most equity indices. The Sensex and Nifty have climbed by over 25%, Nikkei, Hangseng and Kospi have returned over 22% while the S&P 500 has gained by 11%. The best performing index has been the Dax, which has gained by 29%.
In contrast to the good performers, the Shanghai Composite has returned just 3% while the UK FTSE has gained by 6%.
Gold has returned over 5% while crude has gained over 3%. However the Reuters CRB Commodities index, which tracks a basket of nineteen commodities has given negative returns.
US treasuries have returned around 3.3% while Indian government bonds have returned 12%.
The Japanese Yen has been the worst performer with a fall of over 11% against the USD. The Euro has clawed back into positive territory against the USD on the back of short covering while the Indian Rupee is down over 3%.
Will the equity outperformance continue?
The question is will the equity outperformance over other asset classes continue in 2013? The answer is a categorical yes as there are many positives for equities going forward. The positives include:
a) Cheap liquidity from central banks will continue to flood the system
b) Economic growth will flatten out in 2013 and then recover in 2014
c) Corporate performance will improve as many corporates will have improved productivity in the poor growth years of 2010-2012
The Fed, ECB and BOJ (Bank of Japan) will run ultra loose monetary policies to help their economies recover. The Fed and BOJ are running bond purchase programs while the ECB is ready with enough ammunition to stop markets from taking up bond yields of countries such as Spain and Italy. Interest rates in the US and Japan are close to zero percent while rates are at record lows of 0.75% in the Eurozone.
Central banks in China and India will also run easy monetary policy to support growth in their economies. China’s inflation rate has come off sharply from 6.5% levels seen in 2011 to around 2% levels as of November 2012. India’s inflation rate has come off from over 9% levels seen in 2011 to levels of 7.25% as of November 2012. China’s PBOC and India’s RBI have room to cut rates with inflation coming off and with growth rates at multiyear lows.
Cheap liquidity helps drive equity prices higher.
Economic growth across the world is projected by the IMF at 3.6% for 2013 against growth estimates of 3.3% for 2012 and growth rate of 5.1% for 2012. The outlook for economic growth in 2014 is positive given the liquidity and growth measures adopted by central banks and governments. Improved growth outlook for 2014 will feed into positive equity market sentiments in 2013.
Corporates tighten belts in lean periods and this tightening of belts leads to improved productivity as profits are sweated out of lower use of resources. Corporate profitability will improve when demand picks up and pricing power improves, as resource utilization will be optimum. Excess capacity across industries will be drawn down on demand pick up on the back of improved world growth outlook. Equities will rise on improving profitability ratios of corporates and this phenomenon will be seen across the globe.
Stay positive on equities for 2013.
Table 1. Market Movements