September last year marked five years since the run on Northern Rock.
It is encouraging there is light at the end of the tunnel in terms of stability and improved confidence in the UK banking system, evidenced by Lloyds Banking Group being the best performer in the FTSE 100 index last year and the banking sector being a key contributor to positive market returns (Citi Research, January 2013).
Although equity markets were strong in 2012, this was not in conjunction with market earnings revisions as they drifted in the second half of the year, implying a significant rerating of equities took place.
UK GDP growth forecasts for 2013 have steadily fallen over the last few months, leaving consensus at around 1.3% for the year, according to Aviva Investors’ strategy team. 2014 is expected to remain weak as well.
The UK’s AAA rating will remain in focus as, with public debt-to-GDP ratio set to increase further, it will be under pressure. With this background, the MPC will likely keep monetary policy loose and potentially expand the QE target in place. Interest rates in the UK are not likely to move upwards for a good few years.
For 2013, two potential significant supporting factors for the market are money flows and global economic growth rates being upgraded. The argument equities look an attractive asset class versus others has held for a while now so it is hard to make a prediction on when, or if, large amounts of money will switch from fixed interest assets to equities.
Recent data points to the tide turning in favour of flows improving towards equities (Lipper, January 2013). A continuation of this trend would certainly be a positive tailwind for markets. Secondly, as the year progresses, investors would take huge comfort from any upgrade to global GDP forecasts and the positive implications for earnings.
At the company level, various high-profile management changes have either just taken place or are about to occur, which could lead to some interesting stock-specific events. Meanwhile, last year’s theme of management improving shareholder returns via increased dividend payout ratios, special dividends and accelerated share buybacks will continue.
Trevor Green is UK equity manager at Aviva Investors
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