December 21, 2012 / 1:56 AM / 5 years ago

SAFT ON WEALTH-The 3 Ls of 2013: low growth, low returns, lower risk

(James Saft is a Reuters columnist. The opinions expressed are his own.)

By James Saft

Dec 20 (Reuters) - Look to 2013 to be the year of three Ls: Low growth, low returns, and thankfully, lower risk.

The upshot for investors may be a calmer year, but possibly one that is less lucrative. It could be quite a contrast from 2012, which featured plenty of drama, notably in the euro zone, but also decent returns courtesy of a 12.5 percent gain in the S&P500 stock index and a similar return from global shares.

Extraordinary monetary easing and pledges from the Federal Reserve, the Bank of Japan, and the European Central Bank will provide a safety net to investors in 2013. However, we still face a global economy that is facing both deleveraging and a drag from falling government spending in important economies.

What’s more, the juice that fueled the stockmarket gains this year - relief from central banks that pushed money into markets and averted a euro zone blowup - is a one-time gain. In 2013, investment gains will have to come from economic growth, which will be scarce, or an increase in what investors are willing to pay for that growth.

All of that adds up to the prospect of a less fraught year, but not, crucially, a more profitable one.


Even with massive monetary policy support, it is tough to get much growth when large swaths of the globe, such as the euro zone and Japan, are in recession. Others, notably the United States, face a headwind from decreasing government spending. It is impossible to know how the “fiscal cliff” drama plays out, but almost every scenario ends with consumers and companies seeing less money flow into their cash registers and pockets.

Barclays estimates that 2013 will bring an aggregate 1.1 percentage points of growth cut from gross domestic product in industrialized countries due to dwindling public spending and a 1.5 percentage point cut in the United States.

On top of that, the euro zone will still face massive balance sheet issues, as banks, households and governments try to reduce debt at the same time. That has, and will, generate a powerful deflationary force. The bottom line is GDP growth of 0.5 percent to 1.0 percent in the United States and 5.0 percent to 6.0 percent in emerging markets next year.


Financial market returns will come, essentially, from one of two places: economic growth or more willingness to pay for growth. Neither side of the equation looks particularly promising in 2013.

If overall U.S. economic growth is low, stocks could rally if earnings outpace the economy, but given that corporate earnings as a share of GDP are at record highs, this is hard to expect.

The other hope is an increase in investor demand for earnings, assets and yield, although investor appetite may wane compared with 2012. Sovereign debt is very expensive on most measures, often paying a negative real return, while corporate debt is, on some benchmarks, as pricey, and risky as it was before the crash.

Virtually all of this year’s gains in global stocks can be explained by an expansion in the multiple of earnings investors were prepared to pay. According to Morgan Stanley, developed world equities were trading at about 9.5 times expected forward earnings last October, but they now fetch 12.5 times.

One area that could drive equity returns are asset allocation flows if investors begin to reverse their march out of equity and into debt. That could provide powerful multi-year support to equities, but would come with danger. If it happens too quickly, if interest rates rise too rapidly as debt sells off, equities will have a hard time, too. If bonds sell off, a lot of people will lose a lot of money.


The big plus for 2013 is the expectation that central banks will do what is needed to stave off disaster, and that they will act as the re-insurers of last resort against the worst outcomes.

The stance of the ECB, for example, which effectively underwrote the survival of the euro project over the summer of 2012, is much different from a year ago. While it is hard to know if this is good or bad long-term policy, it is definitely market friendly short-term policy.

Similarly, the U.S. Federal Reserve, if anything, increased its commitments, tying its policy more explicitly to unemployment and signaling it will tolerate a bit more inflation to help jobless rolls shrink.

The likely outcome: investors may sleep better but are unlikely to make as much of a return.

“Investors are improperly extrapolating the total returns of 2012 into 2013,” wrote Greg Peters, Gerard Minick and Jason Draho, global strategists at Morgan Stanley, in a note to clients. “Given that returns were largely valuation gains, it is important to remember the catalyst of policymakers’ removal of tail risk, a benefit that occurs only once.”

The best outcome for which we can hope is that 2014 brings a cyclical recovery and a clear path to debt reduction. That would make it the first ‘normal’ year in at least eight.

The worst case boils down to this: investors lose faith in central banks and the money those institutions create.

At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. You can email him at and find more columns James Saft

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