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OPINION

Equities hope for 2013

Equities hope for 2013
December 20, 2012
Equities hope for 2013

A big reason for this is that tail risk - the smallish danger of nasty events - is expected to recede. Most economists expect the US 'fiscal cliff' (a potentially recessionary mix of automatic tax rises and spending cuts in January if a budget deal is not agreed) to be resolved, albeit at the price of a fiscal tightening which ensures the US grows only modestly. The mere decline in uncertainty about US fiscal policy could be sufficient to improve confidence and investment.

And Jens Larsen at RBC Capital Markets adds that, if necessary, the European Central Bank could reduce the risk of a serious recession by introducing full-blown quantitative easing. The lack of disaster, allied to moderate growth, will push up shares, believe many economists. Alan Higgins at Coutts and Mike Lenhoff at Brewin Dolphin both say the FTSE 100 could end next year above 6300.

Another reason for optimism is the amount of money sloshing around the world economy. Anthony Bolton, manager of Fidelity's China Special Situations fund, points to continued QE in the US and investors' high cash balances and says "all financial assets will eventually benefit from this surplus liquidity". This, rather than earnings growth, will drive up share prices.

Nevertheless, a lot could still go wrong next year. There's the risk that the eurozone doesn't pull out of recession by the middle of the year as most economists hope; the danger that the US fiscal cliff is not resolved properly; the risk of further financial crisis in Europe; and other unforeseen bad news. But shares have often risen in the past not because economies did spectacularly well but simply because investors' worst fears did not materialise; the saying 'markets climb a wall of worry' is a cliché because it's true. "Plenty can go wrong," says Mr Lenhoff. "But much can go right."