The Big Event of 2013: 2012

by Michael J. Howell2. January 2013 01:51

We remain upbeat for this year, convinced the seeds for success were sown in 2012. Three 'liquidity' events proved critical: (1) Draghi at the ECB backstopped Eurozone risk with promises of extra cash; (2) Fed policy switched from attacking inflation to promoting employment. This message resonated among several other key Central Banks, so making it the most significant global policy change since Volcker took over the Fed in 1979, and (3) China's PBoC stepped up the pace of its liquidity injections from mid-year 2012. This halted domestic economic weakness; reversed the whopping outflow of foreign capital and promoted outperformance of EM equities from Q3. More of the same should be expected in 2013: paper currencies, notably the Yen, will remain fragile; commodity prices will pick-up; yield curves should steepen and rates start to rise, against the backdrop of still sluggish but better than expected economic activity. Above all EM equities will outperform: they are typically pro-cyclical and currently are out-of-favour with skeptical global investors, whose exposure remains a whopping two standard deviations below average.

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