Despite many of the macro and political themes which dominated financial markets in 2012 not achieving clear resolution, the returns from a number of major asset classes exceeded historical averages last year. This was particularly the case in developed market equities and broadly across credit markets with the additional stimulant of much lower volatility. Moreover, despite the consensus bearishness on Europe at the start the year, European equities and EMU government bonds outperformed in 2012 while the slowdown in China, which made less headline news at the start of last year, precipitated a weak commodities market and poorer performance in commodity-linked emerging markets equities.
Our base case for global GDP growth in 2013, outlined in the first section of this report, is below consensus forecasts and little changed over 2012, with an expectation of continued recession in 2013 and 2014 in the euro area. With several important European elections taking place in 2013, the political dimension to policy making — as seen so clearly in the US with the year-end scramble to the edge of the fiscal cliff — should remain a major factor inhibiting the clear resolution of a number of structural issues. High private sector debts and high fiscal deficits mean that Europe in particular will most likely require a series of sovereign restructurings that will occur over a protracted number of years, thereby prolonging investor concerns.
In contrast to the concerns on Europe, our base case assumes that the US will manage a “Goldilocks” policy transition with lower energy and transportation costs supporting a growing industrial recovery. China managed an orderly leadership change in late 2012. and its economy is now transitioning to a slower growth path of about 7% per annum, with a marked pickup in consumer spending. Despite slower growth, China can be expected to remain a global powerhouse, with real GDP doubling every ten years or so and directly accounting for about a third of estimated global growth in 2013-17, on our forecasts.
Our selection of investment themes for 2013 is influenced by our base case economic scenario and by our asset allocation framework and methodology. Over the course of 2013 as a whole, our asset allocation framework, outlined in the second section of this report, suggests a positive view on equities, a neutral view on credit and an underweight view on government bonds and commodities. Around these views, we discuss some shorter term nuances and amplify some particular themes in other sections of the report.
In equities in particular, we believe that investors need to understand the serious implications on corporate behavior of a global equity market increasingly dominated by income-seeking investors where share buy-backs and higher dividends are being rewarded and increases in capex penalized by shareholders. We also see an increase in M&A and spin-offs as a significant theme in the corporate sector in 2013 aimed at unlocking shareholder value. In Commodities, we discuss the consequences for investors in the year ahead of the commodity super-cycle being over as well as the implications of radically changing conditions in the oil market.
We have selected several investment themes for 2013 that come from our global analysis across industry segments and which we believe have the prospect of strong investor interest. These themes are urbanization in China, how to play the revolution in Gas within the global energy sector, the explosion of smartphone devices, and US real estate.