-       Blue chips out of favour for first time since AIC records began

-       Instead Financials, then Technology predicted top sectors

-       Europe and Emerging Markets most favoured regions

-       See below for fund manager views

The Association of Investment Companies’ (AIC) 10th annual fund manager poll finds most investment company managers optimistic about the outlook for markets next year.  Some 87% of managers expect markets to rise next year, compared to 71% last year, with equities expected to be the best performing asset class amongst 86% of managers.

The AIC received responses from managers representing £22 billion assets, almost a quarter of the industry. Europe and Emerging Markets are the most favoured regions for 2013.

“Risk on”- which sectors will outperform next year?

Blue chips appear to have fallen out of favour.  Whilst they were the most widely favoured sector last year amongst 20% of managers, this year blue chips were one of the least favoured sectors for 2013, preferred by only 4% of managers.  This is the lowest in the poll’s history, in single digit figures for the first time.  Instead, managers are favouring financials for next year (22%), technology (17%) and resources (13%).

 

Financials Private Equity Smaller Companies Tech Blue Chips Resources Manufacturing Other Media Infrastructure
22% 9% 9% 17% 4% 13% 4% 4% 9% 9%

Equities still good value

The feel good factor for over a third (34%) of managers stems from the view that equities are still good value, whilst over a fifth are buoyed by strong balance sheets (22%).  But it’s not all expected to be plain sailing – all managers are braced for some volatility next year, but the majority feel the year will end higher than it started.  Some 62% of managers expect the FTSE 100 to close next year between 6,000-6,500, whilst 14% expect the market to close next year between 6,500-7000.

 

Under 4000 4000-4500 4500-5000 5000-5500 5500-6000 Between 6000-6500 Between 6500-7000
5% 5% 5% 9% 62% 14%

Global recession key concern

But whilst 9% of managers are heartened by an improving US economy, a number of managers (8%) are mindful of the US “fiscal cliff”.  A third of managers think a global recession is one of the single biggest threats for equities (33%), whereas for 25% of managers, a Eurozone debt crisis presents the single biggest threat to equities next year.  This contrasts with last year, when 62% of managers thought the Eurozone crisis was the single biggest threat for equities. Geopolitical instability is the primary concern for 13% of managers.

Europe and Emerging Markets most favoured regions

Despite lingering worries about Europe, Europe appears to have come in from the cold, despite slipping back into recession, and is one of the two regions most widely expected to outperform next year (25% versus 11% last year).  Emerging Markets is the other region most widely expected to outperform next year (25%).  The US was the third most favoured region (21%).

Emerging Markets Europe Asia Pacific ex Japan Asia Pacific inc Japan Frontier markets Japan Latin America UK US
25% 25% 9% 4% 8% 8% 21%

Whilst only 14% of managers planned to increase their gearing (borrowing) last year, this year, 22% of managers said they plan to increase their gearing next year.  A further 56% of managers said they plan to make no changes, whilst 23% will ‘wait and see’.

Annabel Brodie-Smith, Communications Director, Association of Investment Companies (AIC) said: “Managers are viewing next year in a positive spirit, and almost overwhelmingly feel that equities represent good value.  Despite the difficult economic backdrop, it’s actually been a comparatively good year for equities, with the average investment company shares up 7% to the end of November.

“Risk on is motivating managers’ choices for next year, with Financials and Technology predicted to be the top sectors, and Emerging Markets and Europe, the favoured regions. This explains why blue chips have fallen out of favour for the first time in ten years. Whilst managers do not claim to have a crystal ball, it is useful to gauge their views, nevertheless, it’s important investors take a long-term view and do not get overexcited by the latest flavour of the month, or market noise.”

Fund Manager Views

Jeremy Tigue, Manager, Foreign & Colonial Investment Trust said: “There is no shortage of concerns to worry about but stock market investors are being paid to wait for better times with levels of income that look far more attractive than anything else on offer. The best opportunities are in smaller companies with good growth prospects.”

Andrew Bell, Chief Executive, Witan Investment Trust, said: “Equities are on the cheap side of neutral value, balancing the risk of renewed economic disruption with the upside potential if global economic growth appetite picks up. This compares with the negative real returns offered by government bonds and cash deposits. So, whilst real losses are likely from investment in these categories equities are priced to give decent real returns for patient investors, who are prepared to endure the risk of near-term capital volatility.”

Tom Walker, Manager, Martin Currie Global Portfolio Trust said: “Despite the Eurozone muddle and the US fiscal cliff, I suspect the world economy will grow next year but also that we are looking at several years of only low growth rates.  Monetary support should keep interest rates low for some time to come.  In that low growth, low return environment, global equities seem relatively attractive.”

Gervais Williams, Manager, Diverse Income Trust said: “For the first time in around 25 years we are beginning to see the deployment of long term capital allocations into the UK small and micro cap stocks.  This is a sign that markets are moving beyond the credit boom back towards strategies that were successful previously.”

Will Landers, Manager, BlackRock Latin American Investment Trust said: “The prospects for the Latin American region continue to look positive. In the countries we invest in, macroeconomic policies are generally sound, financial systems are well capitalised, strong middle classes are in the process of being established, and corporate governance is comparable to any market in the world.  Overall, we continue to expect Latin America to be one of the first markets to recover once market and company specific fundamentals begin to drive markets again, which has already started, albeit slowly.”

Katherine Garrett-Cox, Chief Executive of Alliance Trust PLC, said: “It does not matter where you are investing, it is very easy to find sound reasons to be bearish about the outlook for 2013. The same old issues prevail, whether it is the ongoing Eurozone Crisis, the austerity plans for the UK, the looming Fiscal Cliff in the US or the potential of lower GDP growth in China. We expect that all of these issues will rumble on into 2013 and beyond.”

Money by Ian Britton-FreeFoto.com

Money by Ian Britton-FreeFoto.com

“However, we believe that there are also plenty of reasons to be bullish. The concerns mentioned above have led to markets undervaluing companies, which in turn provides long-term investment opportunities for investors, such as Alliance Trust. Our long-term, thematic approach to investing, looking across the dynamics of society, enables us to identify companies which will thrive in the years to come. The impact may not be immediate, but investment trusts are ideally placed to invest for the next generation.”

Job Curtis, Manager, City of London, said: “The UK equity market is attractive relative to fixed interest and bank deposits given its superior yield and dividend growth prospects. Even after some progress over the last twelve months, the UK equity market remains undervalued on a long-term basis.”

Dr. Slim Feriani, Manager, Advance Frontiers and Advance Developing Markets, said: “We remain cautiously optimistic on the outlook for global equities in 2013. It is easy to make a bear case on the back of potential concerns over US politics (Fiscal Cliff), Eurozone uncertainties, a weak global growth outlook in the face of continuing fiscal austerity in aging and heavily indebted developed countries, faltering Chinese growth or a reversal in easy monetary policy. However, valuations are low, global economic activity may well be stabilising, earnings expectations are conservative and global investors are cautious and thus underweight equities in general, including in emerging markets.

“So while emerging market fundamentals on the whole remain good and economic growth remains at a premium to the developed world (the IMF forecasts 5.6% for emerging market GDP growth in 2013 versus 1.5% in the developed world) it is difficult to predict the path that emerging markets will follow. It is probably fair to say that any downside is limited with a lot of potential bad news already priced in as valuations are in the bottom quartile of their long term range. A repeat of 2012 is possible, despite a similar list of risks emerging markets could again be on track for modest absolute returns. We prefer our glass half full and consider that 2013 could surprise to the upside as the focus on these risks continues to fade, and investors wake up to the reality of historic low valuations and stronger than the developed world growth in emerging and frontier markets.”

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