Investors in assets of all types will have been well satisfied with the returns they achieved on their investments during Q1. Indeed, all the developed equity markets showed strongly although a few emerging markets did post negative returns. The corporate and high yield bond markets were relatively flat and whilst we did see a slight sell-off in the Government bond markets, this was reversed when news of the Cyprus bailout conditions were announced prompting a "flight to safety".

By and large, commodities tracked sideways, as did most of the commercial property markets, which, once again, saw prime locations outperforming their more secondary counterparts.

The economic news has shown the US continuing to recover, albeit at a rather lacklustre pace, whilst the corner appears to have been turned in China. Europe is a definite laggard, where it became clear that the Euro's problems are far from being fully resolved and, despite George Osborne's protestations to the contrary, the UK economy is not responding well to the austerity diet it is being fed. Indeed, a so-called "triple-dip" recession remains a real possibility!

With the markets having returned close to double-digits in 2013 already, our thinking is that this probably represents the best of the returns for the year. Whilst we do not believe that the markets are overly expensive, a significant correction will probably materialise sometime during the second or third quarters, making for a better entry point for anyone with money that is currently on the side-lines. Equities remain our preferred asset class although the time when it might be appropriate to add some property to the investment mix is approaching. On bonds, we are relatively neutral, preferring corporate and high yield to Governments but do not expect the returns to amount to anything more than their running yields. Overall, we are positive on the outlook as the extremely loose monetary conditions continue to favour investment in real assets and these policies do not appear to be changing anytime soon.

United Kingdom

The FTSE 100 Index is up 8.7% so far this year, with the small and mid-cap indices up even more.

George Osborne's budget contained no surprises. Whilst a triple-dip recession looks to have been avoided, the key challenges of stimulating the economy, whilst at the same time reducing the deficit, remain. Of course, the situation is exacerbated by the weak demand seen within one of the UK's major trading partners, i.e. the Eurozone.

It has been announced that Mervyn King's successor at the Bank of England is to be the Canadian, Mark Carney. This is widely viewed as being a positive development, especially given his success in reforming the Canadian banking system but perhaps the weight of expectation is overly high. Whatever, we will see when he takes up the reins in July. As we have often mentioned, the earnings of many UK companies are generated overseas and whilst the domestic situation remains challenging, we retain confidence in the corporate sector and its earnings generating capabilities. For these reasons, the UK remains one of our preferred investment areas.

United States

The S&P 500 put on 10% during the quarter and made new highs, finally breeching the levels recorded in 2007. The market rally that started in November has now added more than 15%.

GDP growth for Q4 2012 was recently revised upwards to +0.1% but this relatively weak reading was due to a one off reductions in defence spending and in inventories ahead of the anticipated "fiscal cliff". We expect growth in the US to be around 2.5% in 2013, with the housing market now in an up-trend and improving wage growth, despite the fiscal tightening from the budget office. The consensus is that the US recovery is broadly on track, with both personal consumption and business investment continuing to grow at sustainable rates.

In terms of policy, Congress has extended the administration's spending authority until September, thus averting the dangers of a Federal shutdown at the end of March. The Fed has stated that quantitative easing will continue until the unemployment rate falls below 6.5% on a sustainable basis, which is not anticipated to happen until 2015 or 2016 at the earliest, meaning there is no change for the current ultra-low interest rate policy either.

Whilst safe haven assets, such as Treasuries, did enjoy something of a bounce back when the Cyprus situation was at its height, assets with negative real yields are unattractive. Consequently, our preferred allocation would be to US equities and the high yield bond markets, which we believe continue to offer good, but not outstanding, value.


European equities saw mixed performance during Q1 although the relative strength of the Euro would have benefited sterling-based investors. The EuroStoxx 50 was down 0.5% in Euro terms.

Euro area GDP fell 0.6% in Q4 2012, reflecting not only the on-going recessions in the peripheral economies but also increasing weakness within the core, with German GDP declining 0.6% and France's 0.3%, thanks to weak domestic demand combined with reductions in consumer and business confidence. The situation in Q1 2013 appears to have been no better, with the Manufacturing Purchasing Manager Indices showing further weakness in both February and March.

The financial markets did largely shrug off these woes, buoyed by the US recovery and the assurance from Mario Draghi that he would do "whatever it takes" to preserve the Euro. However, the situation in Cyprus will have rudely reminded investors that the Euro crisis is far from over as did the (continuing) political void post the Italian elections.

One overlooked fact is that the Cyprus situation would not have happened if the Cypriot banks had not had to write down the value of their Greek debt by 80%. For the Troika then to demand that depositors in the Cypriot banks effectively pay for the Cypriot bail-out rather than using tax-payer money marks a new, rather dangerous precedent.

That the Troika seems to have consigned the Euro area to further austerity and almost depression-like conditions is somewhat worrying and would appear to postpone the prospect of a meaningful recovery within the Eurozone until at least 2014 but more likely 2015. There is a lingering danger that Europe becomes the new Japan with growth stalling and deflation taking hold. For these reasons, we would not seek to increase allocations to Europe anytime soon.


We said, at the turn of the year, that Japan might be the market to watch in 2013 and the Nikkei has already gained 19% so far this year and is up 40% over the past 6 months. However, this needs to be balanced against considerable Yen depreciation, it having fallen something like 20% against the US Dollar.

The Government led by Shinzo Abe has made significant changes to economic policy since the election in December and the changes in monetary and exchange rate policy are having a real impact. These will be followed up by changes to fiscal policy, with the whole being referred to as 'Abenomics'.

The new administration has demanded that the Bank of Japan raise its inflation target to 2% and with Mr Kuroda recently being appointed as the new BoJ Governor, it is anticipated that the bank will aggressively pursue a policy of asset purchases and balance sheet expansion. It is hoped that this largesse will then feed through to the commercial banks and consumers where the desire is for them to lend and spend their way out of the 20 year economic winter that Japan has endured. For the moment the markets believe in Abenomics but the new administration's honeymoon period may end shortly.

The Prime Minister's approval rating is 70% amongst the Japanese electorate and if he can deliver on his promises, the approval level is likely to remain elevated. It is a market that we will continue to watch with interest but we believe that the best of the returns for 2013 may already have been had.

Asia & Emerging Markets

EM equities have tended not to join the party during Q1 to the extent of their developed market counterparts. Shanghai was flat and Brazil, Russia and India all declined. As a consequence, this is an area we suggest investors look to when considering investments for the balance of 2013 and beyond.

The Chinese economy slowed more than the official figures suggested due to a combination of domestic and external factors. The leadership change meant that the usual policy responses became more muted and policy options have been constrained by some of the consequences of the previous stimulus programme, such as a property bubble and a higher than desired inflation number. Externally, exports have started to recover but sub-par global growth and the on-going problems in the Eurozone makes a rapid turnaround unlikely.

The picture is not dissimilar in some of the other Asian markets, with weakness in export markets and an unwillingness to over-stimulate domestic demand in countries like Korea and Taiwan. Meanwhile, India's economic performance has been disappointing, with growth in Q4 at 2012 just 4.5% y-o-y, the lowest for 2 years. Combine this with political uncertainty, making the implementation of effective economic policy almost impossible, and the poor market performance becomes understandable.

Latin America's economic success in recent years means that the various Governments still have sufficient policy tools at their disposal to stimulate their respective economies. This should allow for sustainable long-term development without any undue short term risks.

Most EM economies are continuing to shift their focus away from exports towards increased domestic demand from their burgeoning middle classes. However, this process still has a long way to go and, in the meantime, the more export orientated economies will struggle in the face of subdued global growth. That said significant investment opportunities remain.

Fixed Interest

For most of the period the yields on Bunds, Gilts and Treasuries were gently rising as fears over issues such as the fiscal cliff and the Eurozone continued to dissipate. Much later in the period, when Cyprus's problems emerged and then a certain young dictator in North Korea started to behave belligerently, these "safe haven" assets bounced back and sharply. This is a behaviour we expect to see repeated, with yields gently rising when investors are embracing risk assets, with sharp corrections on any unwelcome geo-political news. However, we retain our stance that investing in assets with negative real yields is nonsensical.

The quality end of the corporate bond market, e.g. double 'A' and better, has seen yield spreads remain remarkably consistent throughout Q1. Lower grade bonds did benefit from some yield compression, although this was more muted than during 2012. High yield bonds did enjoy a measure of outperformance although, even here, conspicuous value is now in relatively short supply.

Our strategy for bonds remains to employ funds with flexible mandates that can take advantage of the ever changing economic landscape. At some point we expect to see a continuation of the rotation out of bonds and into equities but still anticipate that this will be a very gradual process and, for now, most investors should continue to allocate to bonds.

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