Key themes in 2012

As usual, the Euro zone  featured heavily in the news, especially in the first half of the year, but the European Central Bank’s (ECB) offer to buy bonds from troubled countries reduced the threat of another major financial crisis.

In the US, the Federal Reserve vowed to keep interest rates at around zero per cent with its ongoing quantitative easing strategy (essentially, printing money). While growth in the US was subdued over 2012 there were signs of a housing recovery in the latter part of the year.

Closer to home we had to deal with the predicted end of the mining boom, falling commodity prices and weaker activity in non-mining industries. The Reserve Bank of Australia (RBA) cut rates aggressively throughout the year to a low of 3 per cent, which is the same level rates were at in the midst of the Global Financial Crisis.

Outlook for 2013

At the beginning of the year, the US Fiscal Cliff dominated the media, referring to the combination of expiring tax cuts and new spending cuts due to come into effect at the start of 2013. While a compromise has been reached, there is still much work to be done. In addition, the ‘debt ceiling’ has started to dominate headlines, as politicians try to agree on the level of debt the national economy can withstand. This issue will continue to create debate and uncertainty for some time.

The European Debt Crisis will feature heavily in the media in 2013, with a likelihood that Spain will need to apply for assistance during the early part of the year. While this event will no doubt cause some volatility in the market we are confident that the ECB will keep the Euro zone ticking along.

China looks to continue on its chosen path of lower, but higher quality growth. During 2012 China flagged its intention to focus on growth from its citizens (consumers) rather than obtaining growth via imports from the rest of the world. We expect this theme to continue during 2013 with China achieving growth of around 7.5 per cent. While these figures aren’t as strong as the double digit growth we have seen in recent years, we think this is a more sustainable and prudent strategy.

In Australia, we expect to see interest rates fall further in the New Year as the RBA tries to stimulate the non-mining sector of the economy. While falling interest rates are good news for home-owners with a mortgage, they can be the opposite for self-funded retirees invested primarily in cash.

Falling rates are also a good sign for the share market. Sooner or later investors will begin to realise that cash returns of 2 – 3 per cent do not stack up against the effects of inflation and that there is a real need to invest in growth assets (shares and property) for the longer term.

We continue to monitor the global and local economy and take steps to ensure client portfolios are strongly positioned for 2013 and beyond.