This has come despite the re-emergence of the eurozone crisis in the form of the uncertain Italian election result and the poorly handled Cyprus bailout, though European equities have underperformed other markets.
Performance of indices in 2013
Source: FE Analytics
Although we feel there could be some consolidation in share prices in the coming months, global growth appears to be steadily improving, with the US and China showing marked improvements in some macroeconomic data points.
This should bode well for the UK equity market as we move through 2013.
Fears over the future of the eurozone that had lain dormant since Mario Draghi’s promise to do everything possible to defend the single currency resurfaced in light of the Italian election result and the Cyprus bailout. The latter saw an initial deal to tax all bank accounts voted down in Cyprus’ parliament before a more palatable solution was found.
Although the decision to tax all accounts over €100,000 shows a toughening of the German and European Central Bank’s (ECB) stance toward peripheral economies, we do not feel a precedent has been set for future bailouts.
However, it should not come as a surprise that such a move has been made, as all countries, including the UK, have such limits in place; the nature of the Cyprus bailout is a reminder that this could happen elsewhere.
The effect on the UK we feel will be minimal, despite a fall in banking shares towards the end of the quarter. In the longer term, this could benefit UK banks as they may be considered a safe haven.
However, we are also likely to see sterling appreciate against the euro, possibly reaching levels not seen since share prices began to rally last summer, which may have an adverse effect on some UK equities.
Elsewhere, the US has seen mixed macroeconomic data points, though the good has year-to-date outweighed the bad.
UK corporates operating in the US have released confident updates that we feel are more indicative of the conditions for businesses in the US than the macro environment generally.
In the UK, macroeconomic data has continued to underperform analysts’ estimates and growth is likely to be anaemic during at least the first half of the year, even if the economy avoids the much talked-of triple-dip recession.
Chancellor George Osborne’s Budget delivered almost everything possible within the constraints of the coalition’s deficit-reduction plan.
Lowering corporation tax to 20 per cent by 2015 was the headline measure for businesses, while help for first-time buyers should aid the housing market; a focus on new builds may in time bolster the construction industry.
Although we do expect growth for 2013 to better that of 2012, our initial expectations for an uptick in consumer spending appear to be unfounded.
However, bringing forward the raising of the personal tax-free threshold may encourage shoppers to return to the high street.
The rally in share prices during the first quarter, pausing only to assess the fallout of the eurozone situation, may provide a number of pointers regarding where the market is heading.
Something we have witnessed, as well as participated in, during the past three months has been the number of successful IPOs, a trend we believe will continue throughout the second quarter.
The market for IPOs has been helped by both sellers, buoyed by the rising equity market, and buyers who still have a great deal of spare cash.
What we do not expect to continue throughout the second quarter is such a sustained rally in equity prices. Some consolidation is likely in the coming months, though the first quarter’s gains will act as a good foundation for the rest of the year.
Another reason we expect a certain amount of consolidation is due to the nature of the rally. Moving into the second quarter, we still feel that risk appetites have not returned to the extent one might think when looking at the FTSE All Share’s year-to-date returns.
Equity prices are rising as investors still have cash in reserve; there has been no significant move from fixed income to equities, which would be an indication that investors are taking on more risk.
Yields and flows in the fixed income space have actually held firm year-to-date. Another sign that this rally is not a sign of a more risk-on market is the outperformance of defensive sectors.
With sectors such as pharmaceuticals and consumer staples leading the charge, investors are betraying the fact that they are not as confident as current prices would indicate.
The weakest sector has been mining, a cyclical industry, which has gone in the opposite direction to the rest of the market.
Performance of indices in 2013
Source: FE Analytics
It is rare for mining shares not to be correlated with a rising market.
Therefore, as macro influences again begin to dominate, we would expect some profit-taking as volatility increases from its multi-year lows.
Although some profit-taking is possible in the short-term, we do expect UK equities to continue to make progress throughout the rest of 2013.
Macro issues have returned to haunt the eurozone and UK growth remains stubbornly anaemic, but US data for the most part continues to surprise on the upside, while China has certainly avoided the hard landing many had predicted for its economy through much of last year.
Given the global reach of UK companies, this should provide a boost for UK equities, especially the beleaguered mining sector, which is likely to benefit from strong economic growth in China.
With regard to valuations, the aggregate price of the market still appears cheap, though significant weakness among a number of oil and mining stocks is making the market appear more attractively priced than may actually be the case.
We believe that stock fundamentals will play a greater role as we move through 2013 and will continue to focus on such stock specifics, particularly where we see stocks with sustainable dividends and valuations that do not reflect the business reality.
Alan Clifford has headed up the Lazard UK Income fund since September 2008. It’s marginally beaten its IMA UK Equity Income sector average and FTSE All Share benchmark over this period, with returns of 38.58 per cent.