2013: Searching for a soft landing

Continued from D10 policymakers to right the world’s wrongs.

‘‘We expect a modest improvement next year – with the emphasis on modest. Growth in the US will be slow but positive and at least there are some signs that banks are lending again to corporates,’’ he said. ‘‘Europe is moving in the right direction but not at the pace investors want. Most emerging-market economies have been easing [interest rates] in 2012, which should support a modest recovery.’’

Anthony Bolton, one of the UK’s best-known fund managers, who runs the Fidelity China Special Situations Fund, describes investor sentiment as ‘‘cautious’’ and, while under no illusion that the world has rid itself of economic problems, he believes that is already factored into share prices.

‘‘We are in a world of low growth and low interest rates, but there is quite a lot of liquidity,’’ Bolton said. ‘‘Low growth and low interest rates are quite good for equity valuations. Equities could go quite a bit higher.’’

Koesterich agrees that if policymakers can avoid making mistakes, 2013 should be a reasonable year for stocks. Globally, he predicts shares will rise by between 7 per cent and 9 per cent. China remains a key talking point, given the sheer size of the economy and importance to Australia because of its appetite for resources. Koesterich is confident China can orchestrate a soft landing.

He, like other experts, forecasts Chinese GDP to come in at about 8 per cent next year, propelled by domestic consumption rather than huge investments in fixed assets such as roads and high-speed trains.

BT Investment Management head of equity strategies Crispin Murray argues that in addition to solid GDP growth, Chinese inventories of goods such as steel, which were run down quite heavily in 2012, will not fall by as much next year. This should bode well for the resources sector.

Bolton is perhaps even more optimistic. In the past six months lending has picked up, monetary policy has been loosened and fixed asset investment is off its lows, he notes.

Further, the figures that many cynics pay attention to, such as the level of bad debts carried by Chinese banks and the scale of local-government lending, are not as dire as they appear.

Also, Chinese authorities have learnt from the mistakes they made in the wake of the financial crisis, when they injected too much capital into the economy, and were left with runaway inflation.

Platinum Asset Management managing director Kerr Neilson is less bullish. The world’s second biggest economy faces some challenges.

Labour, he said, was no longer in surplus, so the economy would have to rely on productivity gains to lift output.

There was a risk that the repackaged loans sold to individual investors offering yields of some 5 per cent might not turn out to be as safe as many had assumed.

Further, he argues, the Chinese economy is likely to have slowed by more than the headline rate in 2012 and there are signs that consumer demand is weakening.

For example, Yum! Brands, which owns 5000 restaurants in China, including more than 4000 KFC, and more than 700 Pizza Hut outlets, has suffered a dramatic fall in sales growth in recent months. Indeed, for the fourth quarter this year, sales are expected to decline on a same-store basis.

‘‘It is a bit bewildering. I don’t fully understand what is going on,’’ Neilson said.

He is not the only investment professional concerned about China.

Schroders head of Australian equities Martin Conlon fears that Beijing’s attempts to rebalance the economy, so that domestic consumption becomes the main driver of growth, could falter.

‘‘We believe it is virtually impossible for consumption to absorb the necessary slowdown in fixed investment, ensuring that growth will either slow substantially or excessive fixed investment will drive large-scale bad-debt issues,’’ said Conlon.

The new Chinese regime faced political challenges too. The spread of information via social media would force the government to change the way it dealt with dissent.

‘‘They can’t simply suppress it. They will have to address it,’’ Neilson said.

Closer to home, it is clear that Australia faces some headwinds. The mining-investment boom is expected to peak and then reverse, there is little hope of further commodity price rises, Australian households are still suffering under a substantial debt burden and the high Australian dollar is taking its toll on corporate earnings.

Against this backdrop, only disciplined companies with sound management and stable earnings growth are likely to find their way into investors’ portfolios.

So what do the experts think could derail the global economy and markets in 2013? Koesterich said there was a one in five chance of another global slowdown. A key risk is the deepening of the debt crisis in Europe. Another is a fall off the US ‘‘fiscal cliff’’, a term that refers to simultaneous tax increases and spending cuts, both due to come into force at the end of this year.

‘‘We remain concerned about the United States having its Thelma and Louise moment and driving over a fiscal cliff. In the absence of some compromise, the US will, at least temporarily, be forced to suffer through fiscal tightening equivalent to about 4 per cent of GDP,’’ said Koesterich.

He is also keeping a watchful eye on the Middle East, where Egypt is suffering a constitutional crisis and Syria is embroiled in a civil war. ‘‘That’s the one that worries me most. Globally, we are not strong enough to withstand an oil spike,’’ Koesterich said.

Other experts fear more sabrerattling by North Korea or territorial tensions between China and its neighbours.

Long term, Europe remains a problem child. Bolton predicts it will eventually break up, although that is unlikely to occur in 2013. Citizens of peripheral countries, such as Greece and Portugal, he says, will not put up with austerity forever. Murray, however, thinks Europe will hold itself together.

Koesterich is concerned that full banking union may not occur in Europe until after the German election towards the end of next year, making banks vulnerable to a Greek exit from the euro. ‘‘To be sure, risks of a bank run are substantially lower now, but investor fears may still impact the markets,’’ he noted.