* Shanghai equities dominate investors top picks
* Japan equities and other BRICs tipped to outperform
* Return to the euro periphery on many investors' minds
By Mike Dolan
LONDON, Dec 21 With a whiff of global recovery
in the air and central bank liquidity abundant, investors in
2013 are packing their bags for China, fellow 'BRICs' Brazil and
Russia, long-dormant Japan and even some Mediterranean sun.
Of course, seeking consensus on the top country destinations
for the year ahead is hardly an exact science.
Often the simplest game is to avoid what did best the
previous year, look at the subdued valuations of laggards and
bet on a catch-up depending on the economic cycle. Rank
underlying economic growth rates, factor in policy shifts and
And after five years of stomach-churning global crises, the
more conservative western money managers won't even think of
leaving home without at least some basic 'security checks' - let
alone set off for exotic new frontiers.
So the basis of most 2013 forecasts are the pretty critical
assumptions that the euro won't collapse, the United States will
dodge its looming "fiscal cliff" of tax and spending crunches,
and that China's economy has averted a nosedive in growth.
If none of that sounds an alarm, and you don't want to
hunker down at home, then this year's tidal wave of central bank
liquidity and money-printing from central banks in Washington,
London, Frankfurt and Tokyo is waiting to be surfed.
BULLS AND CHINA
Reuters global stock market polls yet again tell a story of
BRIC rebirth. After two years in which the stock markets of the
four emerging giants underperformed even those of bailed-out
Greece, Ireland, Portugal, Italy and Spain - despite vastly
superior economic growth rates - the old ploy of hoovering up
what's been beaten down seems unshakeable.
China's long-suffering Shanghai Composite - one of
the few major bourses still in the red this year, down 25
percent from early 2011 and still less than half its 2007 peak -
is easily the favourite destination for money managers, with
median forecast gains of 17 percent.
In separate Reuters poll this week of some 55 major asset
managers worldwide, Shanghai was also the top emerging market
pick for more than two-thirds of respondents.
"From a valuation perspective and given the turn in the
cycle, the Chinese equity market - surprisingly a massive
underperformer this year - is the one that stands out," said
Philip Poole, Head of Strategy at HSBC Global Asset Management.
Frustrated China bulls, perhaps unsurprisingly, are keen to
see the gradual rebalancing of the world's No. 2 economy from
exports to consumption show through in the Shanghai markets.
"This is a market that can turn on a sixpence and I would be
very surprised if 2013 isn't a much better year after an 'A'
share bear market that has lasted over three years," Anthony
Bolton of Fidelity's China Special Solutions fund told clients.
Mumbai's Sensex, Sao Paulo's Bovespa and
Moscow's RTS are also among the top five tips in the
Reuters poll, with 14-15 percent gains forecast next year.
That was also this case this year, however, and none have
ended up in the top five best performers. All except Brazil
finished 2012 in the black in dollar terms but they mostly
underperformed "safer" markets closer to home, with even Wall
Street and Frankfurt racking up meaty double-digit advances.
Long-standing BRIC bears have also yet to throw in the
Deutsche Bank's emerging market equities strategist John
Paul Smith reckons China will continue to disappoint with
"structural shortcomings ... too obvious for foreign investors
to ignore". He remains underweight China, Brazil and Russia,
favouring Turkey, Taiwan, Mexico and Poland instead.
The latter two also found favour in the Reuters poll, with
strong returns forecast on the Mexican peso and Warsaw stocks.
But perhaps the surprise package in the New Year's top five
is Japan's Nikkei index, a view this week's election win
for the Liberal Democratic Party is likely to reinforce given
its pledge to step up the fight against domestic deflation.
Even Jim O'Neill, the Goldman Sachs Asset Management
chairman who coined BRIC acronym a decade ago, sees Japan as
2013's best performing equity market, although he stressed
hedging the yen due to the pivotal role a significantly weaker
currency is likely to take in reviving the economy and market.
"There's quite a widespread market belief that if the yen
weakens, one wants to own the Nikkei and obviously with an
export orientation," he told clients.
"But ... if the yen weakens because of new domestic
fundamentals, and investors believe that this has a higher
probability of working, then presumably there will be even
bigger domestic Japanese equity plays to focus on."
O'Neill's top picks still include China and Russia, at
numbers two and three respectively. But he then sees
Mediterranean sunshine in the form of Spain and Italy -
behemoths of the battered euro periphery.
The European Central Bank's August pledge to intervene, and
steady progress by euro governments in advancing tighter fiscal
and banking union within the bloc have effectively removed the
risk of a euro collapse, transforming these markets' prospects.
While elections in Italy and Germany next year might give
pause for thought, the ECB's monetary support and backstop
bond-buying programme - plus global recovery prospects and an
easing of local fiscal drags - are encouraging investors to
Italian stocks returned 10 percent this year, although that
was only a third of German gains. Spanish shares just crept into
More than half the fund managers polled by Reuters opted for
European equities within the developed world, at least 50
percent of whom going for the beaten-down euro zone periphery.
Many also feel there's juice still left in the big
government bond markets of Spain and Italy despite a recent
rally. Over 50 percent of the 32 respondents in the Reuters poll
opted for euro government bonds as their sovereign debt pick for
2013, with three quarters of them specifying Italy and Spain.
"European assets strike back," declared Societe Generale
strategist Alain Bokobza and team, whose top trades for 2013
involve buying the EuroSTOXX 50 against the U.S. S&P
500 and buying Spanish debt versus low-risk German bunds.
Of course, there's always a wild card - usually for the very
brave. As speculation grows of a market-friendly replacement for
ailing populist President Hugo Chavez, Venezuela's tiny stock
market was the white-knuckle bet of 2012.
If you could even get in there, and skirt the risk of
nationalisation or even police raids on currency brokers, it
would have tripled your money in dollar terms since January.
For the less adventurous traveller, local bourses in Turkey,
Poland, Estonia and Germany made up the rest of this year's Top
Five, with hefty dollar gains of 38-60 percent.
If you prefer MSCI's country benchmarks, Africa muscled its
way onto the map with more than 50 percent gains in Kenya,
Nigeria and Egypt. Electoral risk or the threat of political
violence were clearly no deterrents this year.
Portuguese and Greek 10-year government bond returns of
around 80 percent in 2012, were up there with the big
speculative equity bets of the year as the ECB rode in.
Losses of 50-60 percent in politically volatile Ukraine
showed what can happen when things go wrong in small troubled
economies, however, as did similarly poor returns in Cyprus -
likely to become 2013's first recipient of a euro zone bailout.