JP Morgan Asset Management has published a list of key investment themes in 2013.
Whilst these themes are primarily designed for institutional investors, like large pension funds, they can also be applied to retail investors.
Here are four of the key themes along with descriptions from JP Morgan and our own views about how they apply to retail investors.
1 – Seeking yield and income
Interest rates on cash and yields on government bonds in developed economies are typically below the current levels of price inflation. As a result, JP Morgan believes that seeking yield and income will be an important theme this year.
They point out that institutional investors are diversifying away from developed market government and corporate debt to a broader range of return-generating forms of fixed income.
Whilst there are opportunities for higher yields elsewhere, retail investors should keep in mind that there is a clear link between risk and reward.
Moving to emerging market debt, for example, in the search for higher yields brings with it various additional risks, not least currency and political risks. Is the higher yield worth the higher potential for capital losses?
2 – Capturing global growth
JP Morgan explains that many institutional investors are reducing their equity exposure as they seek to de-risk portfolios and boost income levels. They believe that capturing global growth will be an important theme for this year. According to JP Morgan:
“This theme is exemplified by the trend of institutions in the US and UK reducing domestic equity exposure in favour of global, international or emerging market equity mandates that allow them to benefit from the greater economic growth potential of countries and regions that have been less affected by the financial crisis, while at the same time reducing the home-country bias that still persists in many institutional portfolios.”
We expect retail investors to add to their global equity exposure in 2013, as emerging markets become more developed and investors seek better value from the risk assets within their portfolios.
3 – Managing risk and volatility
JP Morgan explains that managing risk and volatility is about more than blindly de-risking a portfolio. Instead, it is about taking appropriate levels of risk to achieve the required levels of returns.
This is something that all retail investors need to consider. Linking investment strategies to financial planning is essential for retail investors.
This should happen in addition to understanding how much risk an investor is prepared to take. How much risk an investor actually needs to take is equally as important.
4 – Monitoring inflation
Inflation was expected to be a major concern in 2012 but this did not materialise. JP Morgan explains that “new paradigm” thinking is always dangerous, and it would be unwise to assume that inflation is dead and buried, particularly given the monetary easing still ongoing in the US, UK and Eurozone.
Inflation can have a big impact on retail investors. The official inflation figures published each month by the Office for National Statistics tend to have little resemblance to the price inflation figures we each individually experience.
Understanding inflation and its impact on our financial planning goals will be important for retail investors in 2013, as we start to better understand the consequences of recent bouts of monetary easing.
Photo credit: Flickr/Bohman
