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Diversification key despite strong global equities

Sophie Cousins  |  25 Jan 2013Text size  Decrease  Increase  |  

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Sophie Cousins is a journalist with InvestorDaily, a Sterling publication.

 

Although global equities should perform well in 2013, investors should still ensure their funds are spread across different asset classes, according to Standard Life Investments.

Speaking to InvestorDaily from Edinburgh, head of multi-asset investing and fixed income Euan Munro said that despite a better-than-expected performance from global equities, investors needed to be smart.

Munro said he believed global economic growth would increase in 2013, led by the United States and China, with uncertainty remaining about Japan and Europe.

"We're slightly optimistic for GDP growth globally, but we're by no means forecasting rampant levels of economic growth," he said.

"It's difficult to get above-trend rates of growth if there isn't credit creation - in many parts of the world, there just isn't efficient credit creation.

"While the demand for credit assets is expected to remain strong, yield compression on corporate bonds is likely. Spreads are vulnerable from earning risks or asset class rotation. Having said that, we favour high-yield corporate bonds, given their delivery of outright attractive income."

In addition, Munro said the year had begun very well for risk assets, with a number of key concerns taken off the table.

"We've had some resolution to the fiscal cliff issue, with it being pushed back, and China has rearranged its leadership without too much of an incident. The pressure that investors are facing is that if they leave their money in the bank account, they get nothing ... people are being [pushed] into a risk-taking position."

But Munro emphasised that risks remain, including the potential for China to stall, currency wars and the re-emergence of the eurozone risk.

"The challenge for China is to make this transition to being a domestically driven economy, rather than it just being the world's manufacturing hub and being an exporter to the rest of the world," he said.

"It needs to improve working conditions for its domestic workforce and give them the opportunity to spend money domestically. If they don't recognise this, it may stall."

"There is also a danger that if everyone tries to race to the bottom in terms of currency manipulation, it could lead to protectionism," he added.

Meanwhile, Munro said he expected Mexico to capture more global investment in 2013 as economic growth slows and higher wages in China make it more profitable to manufacture goods within the central American economy.

Mexico, he said, has a higher interest rate than Australia, which would mean more investors would be more likely to buy the country's sovereign bonds, which he expected to yield about 5 per cent.

"We prefer the Mexican currency [to] the Australian dollar," he said.

"Mexico is a beneficiary of the fact that Chinese labour costs have gone up, making Mexico more competitive against China."