Risk assets, not safe havens, hold the key to real returns in a yield-starved world, according to Seattle-based Russell Investments.
Russell's forecast for 2013 predicts a modestly positive, albeit volatile investment environment, noting that investors were likely to see more signs of a global recovery driven primarily by a continuation of United States and Chinese economic growth.
Even so, volatility would likely remain elevated through most of the year, driven by ongoing recession and solvency fears in the euro zone.
Russell's investment strategists identified six key themes they believed would have the greatest impact on markets and asset returns in 2013.
They were:
US market - addressing long-term issues at last?Euro zone - finding the right policy mix.
Global equities - a rising tide may not lift all boats equally.
Emerging markets - due for outperformance.
Global currency outlook - more of the same, but plenty of risks.
Commodities - it was not just about monetary policy.
Russell had forecast since 2009 that the US economy would follow a square root-shaped recovery pattern and events had played out consistently with those expectations, the strategists said in a research paper.
For 2013, Russell's base case scenario anticipated a continuation of that reluctant-yet-measurably-positive recovery pattern.
''Even though returns will be lower during this recovery process, we do think they are indentifiable and attainable,'' global chief investment officer Pete Gunning said.
On the other side of the square root-shaped recovery with real interest rates in negative territory was the reality that investors still demanded a real return on their assets.
In the view of the dynamics of the US recovery, lingering impacts of the global financial crisis and the invervention by the US Federal Reserve, Russell was forecasting the net effect on investors would be that of ''squeezing'' them out of traditional safe-haven assets and forcing them further up the risk curve, Mr Gunning said.
''Since only positive real returns build wealth, investors are forced to confront the question of what is to be done in a yield-starved world.
''This `squeeze play' impulses people into riskier assets. We continue to advise clients to proceed purposefully and with strategic discipline.''
For investors, that meant attention to every detail of their portfolio management, he said. Regional diversification would need to be firmly in place as the economic centre of gravity would continue to shift.
As traditional investments remained flat, alternatives likely would matter more than ever. Volatility, while it brought market stress, would also bring market opportunity for multi-asset, adaptively-managed portfolios, Mr Gunning said.
CORE EXPECTATIONS
• The US square root-shaped recovery will continue with US economic growth of 2.1% for 2013, increasing to 2.5% to 2.75% by the second half of the year.
• Tepid US core inflation for the medium-term at 1.9%.
• US 10-year Treasury yield at 2.15% by the end of the year.
• A cyclical recovery for the Chinese economy delivering GDP growth of around 8% in 2013.
