Investment - Articles - Schroders' 2013 Outlook: A year in global bonds


 Bob Jolly, Head of Global Macro, Schroders:

 "With yields on developed market bonds still at depressed levels and credit spreads considerably lower than last year, it's clear that a passive approach towards global bond market beta is unlikely to make you rich this year. There cannot be a repeat in 2013 of the bond market returns of 2012. But it will be another year where markets will swing between euphoria - when either growth or politicians offer positive surprises - and misery - when either the political system takes its collective foot off the reform agenda or we see a temporary ebbing in economic momentum."

 Trends to watch in 2013:

 There are a number of important themes we expect to come to the fore in 2013 -

     
  •   France will struggle to maintain market confidence. The French economy continues to be overly sensitive to the state, and with so much state intervention it is gradually losing global market share. Its fiscal position is set to continue to deteriorate and 2013 could well be the year when market participants vote with their feet and begin to exert pressure on French government to embrace a more rapid series of structural reforms.
  •  
  •   Spain will ultimately sign the Memorandum of Understanding, most likely after a combination of market and EU political pressure has materialised.
  •  
  •   The UK will struggle with sticky inflation. With inflation acting as a tax on the consumer, economic growth will remain fairly stagnant. Stagflation will be seen as a major negative for both UK assets and sterling.
  •  
  •   Japan will finally get serious about removing deflation. The printing presses will whir at potentially twice their historical speed. The Japanese yen will be the most likely casualty.
  •  
  •   Asian countries - especially China - will introduce measures to boost domestic consumption. The change in the mix of growth will exert further downward pressure on some industrial commodities. The Australian dollar may well have seen its best days in terms of demand for its major exports.
  •  
  •   The US fiscal cliff will become a fiscal slope. We are about to enter an extended period of fiscal austerity in the US and monetary policy will remain an accommodative offset.
  •  
  •   Balance sheet repair will be an ongoing feature in both household and government balance sheets; financial repression is here for some time to come. Growth will do well to break stall speed.
  •  
  •   The risk of a currency battle, perhaps even a war, continues to grow. All Western countries want to boost exports to improve growth. The easiest way to boost exports is to boost competitiveness through a depreciation of a nation's currency. Asian countries are likely to feel pressure to allow a more rapid appreciation of their currencies to help the transition.
  •  
  •   The Middle East hopefully stops short of a much greater escalation in tension but the pressure cooker will continue to simmer. Risks are quite probably underestimated by markets, especially when you consider the economic havoc a $200 oil price would cause.

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