In emerging market sovereign debt, there will be an increasing realization that certain sovereign issuers are more deserving of safe haven status than developed peers.
-Columbia Management and Threadneedle Asset Management
We continue our outlook for 2013 with a review of select international economies and financial markets. Similar to the U.S. the road to recovery will be bumpy and we expect financial markets to continue being affected by macroeconomic uncertainties. While the overall environment remains uncertain, some of the significant headwinds in 2012, e.g. the Chinese leadership transition and a complete disintegration of the eurozone, are perhaps less concerning for markets than they were a year ago. Moreover, in the eurozone, there is now at least a recognition that very tough decisions lie ahead. Several European politicians have indicated they know how to address the debt crisis, but not how to get re-elected if they do. Sound familiar?
Interest rates will remain low indefinitely and the search for yield will continue. However, fixed income investors should not expect a re-run of the easy ride they had in 2012. Active management will play an important role given the strong returns from many fixed income assets over the past 12 months. In a low growth world, we expect strong companies to get stronger. Businesses that can deliver sustainable growth should be able to command premium valuations, given that overall rates of economic growth will remain subdued. Developed world government balance sheets are likely to remain under pressure, and investors will continue to question the sustainability of current policy.