A Guide To Investing In 2013
Wednesday, January 2, 2013 The UK economy officially emerged from its double dip recession in the Third Quarter of 2012. However, prospects of the fiscal cliff and a potential slowdown in the US could have far reaching affects in both the UK and Europe. Many are predicting a triple dip recession in the UK as the country is likely to suffer a post Olympic slump. Over £8.5 billion was spent on the London Olympics and the government has now accumulated a huge Budget Deficit, the cost of which will be borne by the taxpayer trough continued austerity for at least 6 more years according to the Chancellor’s latest statement.
The continued uncertainty over the Eurozone debt crisis together with the current climate of low interest rates make it difficult for businesses and investors to generate a return on their assets. Further, the prospect of rising fuel, energy and food prices mean that savers are forced to pursue riskier ventures than they might otherwise have accepted in order to maintain a reasonable return on their assets. Many large businesses are simply stockpiling cash for want of a better alternative and are waiting for market opportunities to arise. Investors on the other hand will be looking to move their funds to invest in safer assets such as property and commodities.
The UK has been seen as a safe haven for investors looking to move their savings out of the troubled Eurozone for fear of a Euro collapse. The safe haven status has benefited London to date but this could well change given the government’s failure to tackle the Budget Deficit and fears that the Bank of England may not meet its inflation target in 2013.
Pension funds have struggled to maintain a reasonable return on their assets as the equity markets have been increasingly volatile in 2012. Many pension funds have invested heavily in the bond market at close to zero rates of interest with some bonds reportedly generating negative returns due to the absence of suitable low risk alternatives.
Fund managers are having to work hard to maintain a reasonable return for their clients. Investors tend to favour large blue chip companies and defensive stocks when investing in a recession. Investing in the FTSE 100 is seen by most as a flight to safety in these uncertain times. However, the rise in the share price of defensive stocks often means that the yields on these assets is no longer attractive. Defensive stocks have therefore become too expensive. Investors and fund managers have therefore been looking to invest in small businesses in order to attain the required rates of return for their portfolios. Smaller company stocks have significantly outperformed the FTSE 100 in 2012, a fact that fund managers have become increasingly aware of over recent times.
Whilst the economic environment appears gloomy to most, a well managed small or growing business may find the conditions favourable. More investors are looking to invest in small business and angel investors open to new business ideas. The new government back Seed Enterprise Investment (or SEIS) scheme offers significant incentives to angel investors who can obtain 50% tax relief when investing in new startup businesses. Business owners are advised to discuss the merits of the SEIS scheme when approaching potential investors.
Many senior analysts believe that the UK economy will remain weak over the next 12 months. Businesses will therefore be looking to expand to emerging markets as a source of growth where possible. Venezuela had the top performing stock exchange in 2012 and both China and Poland performed particularly well. Investing in Europe remains a possibility. Whilst businesses must proceed with caution over the prospect of a devaluation in the Euro, European businesses on the whole are regarded as cheap and could represent significant buying opportunities.
Investing in the US is not so clear cut. There are signs that the US is on its way to recovery. A strong manufacturing base together with the availability of cheap energy leaves the US well placed to outperform Europe and the UK in 2013. Consumer confidence is returning and the housing market is beginning to stabilise. However, fears over automatic tax rises and spending cuts imposed by the US Fiscal Cliff could send the US economy back into recession. We would anticipate cuts in government spending particularly in the healthcare and defence industries which could have knock on effects to some of our clients in the UK.
Deflation has become a cause for concern for many economists in 2013. The excessive money printing by the Central Banks in the Western Economies has provided a temporary sugar rush to the markets and helped to forestall recession in those countries. However, deflation has now become a significant risk for Europe, the US and the UK in much the same way as it has affected Japan over the past 20 years. The collapse in the Japanese banking system bears many similarities to what we have been experiencing in Europe over the past 4 years. We believe that businesses and investors should reduce their exposure to banks. For individuals, no more than £85,000 should be deposited with each UK bank as the excess will not be covered by the FSA. Investors should also avoid highly indebted businesses which are more susceptible to economic slowdown.
Costas Georgiou of Belsize Accountancy believes that cash generative small businesses with high barriers to entry will become increasingly attractive investments for fund managers and angel investors in 2013.