Collins Stewart: Our key investment themes for 2013 – Investment Week

Collins Stewart Wealth Management’s global strategists Robert Jukes and Edward Smith outline their five key themes to dominate financial markets in 2013.

1. Infrastructure

We concentrate on picking securities with favourable risk/reward profiles that benefit from secular themes less exposed to cyclical aberrations.

Europe, and indeed much of the developed world, faces twin headwinds to growth in a shrinking (ageing) labour pool and a bleak outlook for productivity after a decade of misallocated capital.

Offering private companies infrastructure partnerships at favourable rates is one of the only ways to boost the outlook while trimming the budget. Elsewhere, Asian governments are working hard to build the infrastructure and welfare services, which are essential if they are to encourage their consumers to spend some of their excess savings.

2. US industrial ‘on-shoring’

Hydraulic fracturing – more often known by the colloquial ‘fracking’ – has revolutionised the extraction of natural gas in areas with extensive reserves trapped in shale rock.

This revolution, unique to the US, has led to a structural adjustment to the price of the US natural gas benchmark (the Henry Hub) to the scale of c.-50%. Energy inflation at the factory gate has collapsed, despite rising oil prices, arresting the decline in the US terms of trade.

This could have a significant read-through to energy intensive industrial stocks in the US, improving their competitive position and supporting margins. Indeed, we may be at the beginning of an ‘on-shoring’ trend, as US domestic firms win back some market share lost to Asian and Latin American competitors.

3. Gilts – still a low cost diversifier this year

Controversially, we still believe gilts and high quality bonds offer the lowest cost risk mitigation strategy for multi-asset portfolios, bleeding far less into returns than derivative overlays, for example.

Undeniably, yields will balloon at some point over the next five to ten years, but policymakers, who remain deeply sceptical of today’s economic foundations, will impose a de facto ceiling for at least another 12-24 months. Despite four years of extraordinary money policy, monetary conditions are not loose enough.

4. Central bank politicisation

The model of central bank independence has fallen under the microscope recently, and is being openly questioned by academics. Of course, the reality is always more complex than the model.

Given that central banks are unable to act within an economy where ‘all other things are equal’, we should probably view pressures on their independence more sympathetically.

In that vein, we believe Japanese government pressure on the BoJ may push the yen below 110 versus the dollar this year. More importantly, developed world interest rates (and bond yields) are likely to remain more or less where they are for the next 12-24 months, as policymakers, sceptical of the sustainability of recovering growth, struggle to offset governments’ fiscal drag.

5. Beginning of the gold bear market

We think gold prospects have been tarnished, and our model suggests it has much further to fall to $1,000 by 2015. If you believe today’s gold price is the manifestation of an anticipated reversion to the gold standard and collapse of fiat money – and that our model is broken – then continue to ready the vaults.

But if you believe the major disinflationary threats have receded and we are entering a prolonged period of weak growth in which most major currencies are due to devalue against the dollar, gold should be far less attractive. With or without a gold standard, gold is still an alternative currency.