However, it would take a significant catalyst to shake markets out of their current slumber. In the meantime, we can expect asset prices to be squeezed between a gradual improvement in global economic fundamentals, driven in part by monetary stimulus, and a continued threat of political risks, pressures on profits and sharp commodity price moves.
US equity markets remain in the uncomfortable grip of politicians, who continue to deliberate on tax and spending changes relating to the ‘fiscal cliff’. Fortunately, the underlying economic story is one of steady improvement in the US. One source of particular optimism is the housing market.
In the UK, there has been a gloomy tone to recent forecasts. The Bank of England halved this year’s growth forecast to just 1 per cent. This is feeding through to a deteriorating earnings backdrop as analysts plug in weaker trends for 2013. One of the key determinants of market momentum in 2013 is likely to be the health of the UK consumer.
In Europe, the whirlpool of sovereign solvency in the periphery continues to drag the wider region into turbulent waters. Economic data remains poor, with France, Spain, and Italy displaying worrying signs, while election risks are once again on the horizon with ballots in Italy and Germany in 2013. From a policy perspective there does appear to have been some progress with the ECB announcing the details of its Outright Monetary Transactions programme. This has kept funding markets open to sovereigns and financials and has pushed equity markets up since the beginning of August.
The growth story in global emerging markets (Gems) is far more favourable, with the combination of strong domestic fundamentals and extremely loose monetary policy proving a strong tailwind.
Finally, there are some interesting changes afoot in Japan with equities boosted by recent comments from opposition leader – and now prime minister - Shinzo Abe regarding a more aggressive stance on monetary easing and inflation targeting.
Equity markets are likely to extend their sideways movement in 2013. Investors are, on balance, assuming that the world economy will muddle through.
To break out of this trading range, investors need to see some decisive news, probably from corporate earnings and then capital spending.
Andrew Milligan is head of global strategy at Standard Life Investments
