Widows Investment Partnership
2011 has closed with many markets producing much better returns than the
accompanying newsflow might have led us to expect.
UK Government bonds had an astonishing year in 2011, producing the best
returns since 19981. The US market is up 9.19%2 on the
year and in the UK the FTSE100, despite our "age of austerity", is virtually
unchanged if one includes dividends.
Admittedly these returns mask some extreme volatility over the last year and
this seems certain to persist as we survey an uncertain world this year - but
as in 2011 there will be opportunities to buy attractive assets on reasonable
valuations and to exploit any volatility.
SWIP fund managers look at the prospects for the year ahead and what they
expect as they chart a course through this uncertain world.
1) Richard Dingwall-Smith, Global Economy
2) Peter Cockburn, UK Equities
3) Mike McNaught-Davis, International Equities
4) Malcolm Naish, Real Estate
5) Mark Connolly, Fixed Income
6) Mark Harries, Multi-Manager
7) Jeff King, Multi-Asset
1) Richard Dingwall-Smith, Chief Economist at SWIP, gives his
“The economic outlook for 2012 is one of divergence rather than
uniform gloom. Unfortunately, the eurozone is currently in a recession as a
result of tightening credit conditions, increased fiscal austerity and
“However the US gives us reasons to be optimistic with signs of improving
credit availability, recovering confidence and some firming of the labour
market. We expect that growth in the US will pick up to 2.7% in 2012 and 3.0%
“For other world economies the outlook is mixed; Japan’s exporters are
struggling but post-earthquake recovery and reconstruction should see overall
GDP growth running at close to 2% in 2012 before falling back to 1.5% in 2013.
The UK will be held back by weakness in the eurozone: we see another year of
sub-1% UK growth in 2012 followed by a pick up to a still below trend of 1.8%
in 2013. Emerging and developing countries are slowing from a robust pace but
have scope to ease policy as inflationary pressures fade.
“To conclude, we expect - based on purchasing power parity weights - that
global growth will slow from 3.7% in 2011 to 3.4% in 2012 before picking up to
3.9% the following year. All these figures are below the 4% average pace of
the pre-crisis decade to 2007. Against this background we expect that global
inflation over the next two years will be fairly subdued, despite continuing
very easy monetary policies in most countries.”
2) Peter Cockburn, Head of UK equities at SWIP, comments:-
“There has again been much to worry about over the past year.
Political indecision has continued within the eurozone, leading to significant
downgrades to economic growth prospects in the region and beyond. Asian growth
has faltered and political change in the Middle East has asked as many
questions as it has answered.
“Perhaps not surprisingly, given this backdrop, UK market volatility has been
high – but the financial strength of the quoted corporate sector, allied with
reasonable valuations, has given support to the market over the year.
“It is likely that these themes will once again dominate in 2012. The macro
debate will continue to rage but again the corporate sector faces the economic
headwinds in reasonable financial health. Balance sheet strength, dividend
yield and earnings visibility are likely to remain profitable themes in the
year ahead. As global asset allocators survey an increasingly difficult world,
assets displaying these sorts of attributes will look attractive relative to
many of the alternatives.”
3) Mike McNaught-Davis, Head of International Equities at SWIP,
“A vacuum in decision making coupled with divided sovereign
interests and conflicting priorities threaten to make 2012 a tough year for
Europe, with a recession almost unavoidable. Bond markets are predicted to be
the biggest victim of the eurozone recession as yields potentially spiral out
of control and cause insolvency for many European countries.
“Whilst the US is not immune to volatility, SWIP remains optimistic that it
can avoid a recession by reverting back to the robust strength and economic
flexibility it demonstrated through the crisis of 2008 and 2009. However,
austerity measures to reduce the high government debt must take precedence in
“SWIP forecasts growth next year is likely to be driven by emerging markets,
in particular China which benefits from stabilising inflation rates.
“Against the backdrop of economic uncertainty however, there is some good news
for investors as equity markets are well positioned to take advantage of a
healthy corporate sector, undervalued stocks and low interest rates.
“It is clear growth has been stunted by the insecurities of neighbouring
economies; however as they reposition themselves to emerge from the financial
crisis of 2011, it is important we do not underestimate their power and
influence in stimulating activity and growth in the markets.”
4) Malcolm Naish, Director of Real Estate, comments:-
“Capital and rental growth continued to slow towards the end of
2011, with income being the main contributor to returns. Despite capital
growth slowing, UK real estate saw 27 months of consecutive growth to the end
of October. However, although property prices in the UK have risen 17.8% since
the market started to recover two years ago, values are still well-below the
peak levels seen in 2007. In our opinion the real estate market remains
fairly-priced and there are still good, long-term investment opportunities to
be found in certain markets and locations.
“The prospect of weak economic growth over the next few years will have a
direct effect on rental growth in the property market. With subdued consumer
and business spending likely to dominate, companies will be reluctant to
expand or to look for new space any time soon. As such, rental growth is
expected to be weak for some time to come. We also believe that some of the
shine may be finally coming off central London and that yield compression in
this market may be over. Generally speaking we believe that real estate yields
will drift out in the short to medium term, in keeping with trends in gilt
“However, SWIP expects real estate to produce relatively attractive
performance with total returns currently expected to average around 5 to 6% pa
over the next five years. In this climate income continues to be important and
we expect this to dominate total returns over the coming years.”
5) Mark Connolly, Director of Fixed Income at SWIP comments:-
"We have witnessed extraordinary times as investors over the
last year across all asset classes and fixed income has not been immune to the
global uncertainty which has spooked markets throughout 2011. The year has
delivered its fair share of confidence-sapping events and together with the
ongoing turmoil in the eurozone and the growing fear of contagion, we have
seen a sharp widening of yield spreads between government and corporate bonds
to levels not seen in almost two years.
"Against this gloomy background, the Bank of England's Monetary Policy
Committee's approach suggests that UK interest rates will be kept very low for
some considerable time yet. Taking this all into consideration, we believe
that on valuation grounds there are compelling reasons to sell government debt
because yields are so low there is limited scope for further rallying. We will
therefore take an opportunistic approach to selectively sell safe-haven
assets. On the credit side, we believe that high yield bonds compare
favourably to gilts and also look more attractively priced than investment
"That said, SWIP believes that long term fixed interest opportunities will
continue to present themselves as they do in any environment and we'll look to
capitalise on these opportunities."
6) Mark Harries, Head of Multi Manager at SWIP, comments:-
“Given the uncertain economic situation, further volatility is
very likely in the coming months and at the moment there appears little
prospect of short term economic improvement.
“There are, though, some reasons for hope. We see the US as being capable of
picking up pace over the next year or two. A rebound in Japan is possible as
well, following the tragic earthquake last year. Meanwhile, there have been
some positive developments in Europe, albeit at a slower pace than we would
have liked. The European Central Bank’s decision to cut rates was positive;
however, it is sticking to the script and, even though bond yields are moving
to financially unsustainable levels, a massive dose of quantitative easing
“For investors, the risks in the market are well known, and clearly reflected
in equity valuations. Corporate results have generally been good, while
company balance sheets remain strong. And, given the current macroeconomic
uncertainty, interest rates will continue to stay lower for longer.
“The consensus from the managers we speak to is that despite some highly
attractive valuations, they lack the confidence to get back into risk assets.
Until evidence that Europe is sorting out its debt problems and/or there is
evidence of solid economic growth, any stock market rally is not likely to be
sustained. Against this background, we shall continue to adopt a cautious
approach for the time being. That said, we will make investments according to
our judgements of asset valuations. So we may well look to buy more equities
following periods of stock market weakness and sell into strength. This
applies to all asset classes.”
7) Jeff King, Head of Multi-Asset Funds at SWIP, gives his comment:-
“As we move into a New Year, there are tentative signs that the
US is starting to pick up and there is evidence of a recovery in Emerging
Market demand; although Western Europe appears to be in a more difficult
position. After years of excessive spending, the major European economies are
being forced to tighten their belts through fiscal tightening whilst at the
same time relying heavily on consumer spending to support domestic growth. The
EU will have to come to an agreement on the way ahead by the beginning of
March as Italy and Greece have to roll their debt. As we move through 2012,
market sentiment on Europe will be driven by commentary from the posturing of
politicians and rating agencies.
“There are many investors out there holding their breath and crossing their
fingers, anxious about what the future holds. What are the prospects for this
year? Markets are finding it difficulty to make headway, presently, as there
are too many uncertainties. However, as the year progresses greater clarity
should allow markets to move forward.
“With careful analysis and selection, value can be found in a number of asset
classes. However, with the current uncertainty we believe it is important to
spread risk by investing across a broad range of asset classes, and avoid
excessive reliance on any one investment.
“Finally, as previously mentioned, volatile markets will always present
investment opportunities and we will look to purchase assets when they appear
relatively cheap, but also be prepared to sell them again if they become
overpriced. There are always good investment opportunities to be found despite
- Ends -
Notes to Editors:
1Source: SWIP internal
2Source: Datastream; percentage increase in Dow Jones index
over the year to 31 December 2011, including dividends.
Scottish Widows Investment Partnership
SWIP’s ultimate parent is Lloyds Banking Group, one of the largest financial
services groups in the UK.
SWIP has a geographically diverse client base with alliances and clients in
the UK, across Europe, USA and Japan.
SWIP is one of the UK and Europe’s largest fund managers with £136.92bn funds
under management (Source: Internal, as at 30 September 2011).
SWIP has a broad client base, managing assets for Pension Funds, Charities,
Local Authorities, Life Funds, Unit Trusts, OEICs, Off-Shore Funds and
Specialist Funds across all major asset classes.
SWIP is authorised and regulated by the Financial Services Authority and is
entered on their register under number 193707 (www.fsa.gov.uk).
Investment markets and conditions can change rapidly and as such the views
expressed should not be taken as statements of fact nor should reliance be
placed on these views when making investment decisions. Past performance is
not a guide to the future.