There continues to be many moving parts to the investment outlook as we enter 2013. In our mind, five themes, outlined below, stand out as being particularly important for 2013. World growth will remain low on average but negative in the UK and Europe; price inflation will remain sufficiently subdued for a while longer so as to impose no constraint on monetary expansion; central banks will sustain a regime of negative real interest rates and rapid monetary expansion; the risk of a eurozone collapse is off the table for now; finally, stock markets should continue to perform better than expected, even though the four-year old cyclical bull market is long by historical standards.
Supporting our thesis is the fact that major institutional, high net worth and retail investors continue to be traumatized by a) the crash of 2007/2008, b) sustained high unemployment, c) concern over the sustainability of unorthodox monetary policy and d) the extreme difficulty of getting government debt/GDP ratios on a credibly falling trajectory. The structural bearishness of most investors combined with ongoing massive central bank liquidity bodes well for the stock market and risk assets in general. A continuation of the rising trend of stock prices with plenty of volatility, reflecting the still- elevated level of risks still seems the most likely outcome for 2013.