LONDON Investing in the shares of the biggest and healthiest U.S. and European companies could generate near double-digit returns in 2013 as a cultural shift in global finance favors quality equities over bonds, a top investor said.
Saker Nusseibeh, head of Hermes Fund Managers, which is owned by Britain's largest pension pot, the BT (British Telecom) Pension Scheme said the financial industry is re-examining itself and returning to some almost forgotten norms.
Globalised, large companies with strong balance sheets offer the best prospects with the ability to pay reliable dividends, distinguishing them from "speculative" equities or even bonds, Nusseibeh told the Reuters Global Investment 2013 Outlook Summit on Monday.
"I think people are beginning to talk about there are certain assets which can grow with inflation, which can pay a dividend and have strong balance sheets," he said.
Bonds - popular with investors since the financial crisis as a safe haven and a source of income from the coupons paid by government and corporate borrowers - are likely to have reached the end of their run, he added.
"We're done with the bond markets ... it could go a little bit more, but call the top of the bubble, who knows?" Nusseibeh told the summit, held at the Reuters office in London.
The prediction for equities is at odds with forecasts in some quarters of the financial industry of an end to the cult of equity, prompted by more than a decade of disappointing returns and periodic stock market crashes.
But Nusseibeh stressed he was not expecting the return of the bull markets of the pre-crisis era so much as a reassessment of what role equities can play in an investment portfolio.
"The reason people first bought equities more than 100 years ago was not because the price of the stock appreciated, they bought it because it paid a dividend," he said.
"The big turn in equities ... will happen when people start thinking about equities slightly differently and they are beginning to."
Nusseibeh expects equity buyers to divide into two camps: a mainstream looking to dividend-paying stocks as a source of income and a second more speculative faction buying in the hope they will jump in value.
He warned, however, that the biggest risks in the current environment were political, a reality the financial services industry - too dependent on quantitative modeling - has ignored.
Finance has become lulled into potentially dangerous assumptions that the financial and economic can be separated from the political by many decades of relative political stability in the Western world after World War Two, he said.
Indeed, his expectation of strong returns from equities next year could be jeopardized by political decisions to raid company balance sheets for tax revenues as governments grapple with fiscal deficits, Nusseibeh added.
"The danger is of course the companies have large balance sheets and the governments look at them and think, 'yummy yummy, they've got money,'" he said.
Apart from top quality companies, Europe's economy will remain beleaguered while its political elites continue to haggle over how to resolve the euro zone debt crisis, he said.
In contrast, Nusseibeh anticipates a credible recovery in the United States with re-elected President Barack Obama successfully avoiding a stalemate in resolving the country's looming fiscal problems.
"I'm not saying I'm a believer in a great recovery in the United States but in a world in which economic growth is zero, growth of 1.5 percent is very good," said Nusseibeh.
A recovering United States will in turn benefit China, he said, though he remains less enthused about other emerging markets, particularly Brazil where political interference makes the future hard to predict.
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(Editing by Susan Fenton)