Article published in L’Echo (Belgium) on 12 January 2013 and in Beleggers Belangen (Netherlands) on 14 January 2013.


Despite a generalised deterioration in the Eurozone economic climate, the fears of a hard landing for the Chinese economy and the seemingly endless US fiscal cliff saga, 2012 was a good year, even a very good year, for a broad spectrum of markets and asset classes. What lessons can be learnt and how can they help us be better prepared for 2013? I have identified seven:



When the fundamental variables (economic conditions, inflation, etc.) stop deteriorating, asset prices start to climb again; for investors the end of deterioration is in itself an improvement. This is one of the factors explaining the Indian market’s good performance in 2012 and which investors should bear in mind when analysing countries (in the euro zone for example) or stocks in difficulty.


Cheapness is neither a necessary nor sufficient condition for good returns. Chinese equities were already very cheap at the beginning of 2012 but continued to disappoint during a large part of the year. In contrast, US bond prices, already expensive at the beginning of the year, continued to rise. A catalyst is needed for an attractive valuation to be followed by a price rise.


The markets are ‘serially mono-focused’. Although various themes may be relevant, one generally dominates. The US fiscal cliff at the start of 2013 has been known about since the summer of 2011 but it was not until after the presidential elections that it became a focal point for investors. Investors must be capable of identifying the dominant theme but also of spotting when a new theme is about to take over.


Crowded trades are not necessarily a bad choice. Corporate bonds were already greatly in demand in 2011 but continued to gain strongly in popularity in 2012. This obviously makes it all the more important to evaluate at what point the main factors underlying such enthusiasm are likely to change.


When the existing orthodoxy becomes too much of a constraint, it changes. The IMF has revised its stance on obstacles to capital movements (previously inadmissible but now acceptable failing any other solution) and several central banks (but not the ECB) now accept higher levels of inflation than before. It is therefore necessary to assess a portfolio’s sensitivity to inflation risk.


Spread strategies (corporate bonds, emerging debt) follow long trends of contraction in spreads relative to high-quality sovereign bonds, whereas equities constantly need new stimulants. The long-term refinancing operations launched by the ECB at the end of 2011 and beginning of 2012 boosted the markets for only a few weeks. The same applies to Mario Draghi’s declarations (that the ECB would do everything necessary to save the euro). This means mini-cycles in equity markets.


When uncertainty is high, long-term expected returns are also high because asset prices are low. Consequently, any decline in uncertainty results in a fall in expected returns because of the rise in the markets.


This last lesson is possibly the most important to be learnt from 2012: having the courage to buy when things are going badly but there are nonetheless sufficient grounds for believing that the situation will improve.


William De Vijlder

Chief Investment Officer, Strategy and Partners

BNP Paribas Investment Partners