The world’s major economies performed “pretty close to expectations in 2012” and as yet there are no red flags pointing to a risk of a renewed global recession. But disappointment remains as most economies still require “extremely supportive official help” to prevent a relapse and despite a spread of economic growth forecasts for the year ahead, certain economies are more at risk than others, according to Standard Life Investments.

Meanwhile, at year-end investors often make forecasts for stock markets and other asset classes relating to the ensuing 12 months, but such estimates “can often be no better than a leap in the dark” and result in unexpected short-term shocks, the global asset manager warns in its 2013 Global Outlook. 

Rather, the firm believes that there are benefits in examining longer-term (say five- to 10-year) return numbers, as the discipline of making a long-term estimate forces investors to decide on “credible key assumptions” and assess the sensitivity of the final numbers, it said. Other advantages include the potential to profit from periods of short-term mispricing and the confidence to pursue illiquid investment opportunities that may yield above-average returns in the long run.

“To quote the academics Ang and Kjaer, ‘the turmoil we have seen in capital markets in the past decade has increased the competitive advantage of a long time horizon’,” the firm said in its outlook. And there are numerous ways of making long-term return estimates, explained chief executive Keith Skeoch. “At its simplest, one could extrapolate recent history,” he said. For example, the total return for US equities was around 7 per cent per annum in the decade ending 2012, while the real return for global equities since 1900 has averaged about 5 per cent a year.

“2012 saw stock picking rewarded as investors started to look through the big picture, as can be demonstrated by the performance of many of our equity funds,” Skeoch added. “Robust equity returns at a time when macro concerns remain high may be a sign that the nature of returns are changing, back to a focus on the fundamentals, the importance of research and a robust and repeatable investment process.”

Overall, the asset manager believes that portfolios over the next 10 years should be orientated more towards the riskier end of the spectrum, namely equities and real estate, and less towards government bonds.

Growth ahead

While the US economy “more or less” met market expectations in 2012, this is likely to have been an under-achievement, Standard Life said. “In the approach to November’s presidential election and December’s fiscal cliff debate, there was clear apprehension about whether to invest, recruit and spend.” Had it not been for those uncertainties, the odds are that GDP growth would have been closer to 2.75 per cent a year than 2.25 per cent (although it is difficult to quantify the precise impact). However, despite a “likely drag” from fiscal policy initiatives and extra regulatory intrusion, the US economy should maintain a “decent pace” of expansion in 2013.

Meanwhile, the economic picture for the UK is unlikely to be as distorted as it was in 2012, with the royal wedding, Jubilee celebrations and Olympics providing a celebratory tone. Market expectations are that the economy will rebound by over 1 per cent this year, but even this figure could prove to be a bit on the low side, the firm said.

Perhaps unsurprisingly, given market volatility over recent years, Standard Life concludes that while most economies have “moved some way towards tackling the challenges that they face”, material headwinds will continue to hamper growth prospects in 2013 and beyond.