THE Eurozone has been in recession for four of the last six years; until recently Japan was mired in deflation; and UK growth ground to a halt in 2012, writes Gary Welford of Brewin Dolphin. 

It seems 2013 may be remembered as the year the world started growing once more; however, it has been far from plain sailing.

As Big Ben rang in the New Year, the United States congress was in session, passing the Taxpayer Relief Act. This legislation postponed the impact of what had become known as the fiscal cliff – a cocktail of spending cuts and tax hikes which were due to take effect at the start of 2013.

By March the prospect of a US government shutdown loomed, but a stop gap measure forestalled the closure until the autumn which, typically, coincided with my planned trip to the US. The 16 day shut down caused embarrassment around the globe and seriously altered the direction of travel for my rented 5 door Chevrolet Impala.

In the summer the Federal Reserve announced it was contemplating the date on which it would reduce the pace of printing money to purchase bonds, known as quantitative easing.  Bond prices responded by plunging, sending long term interest rates for companies and homebuyers higher.

During the second half of the year traders hung on to every word spoken by Federal Reserve officials for any steer as to when the current $85 billion monthly buy back programme would be tapered. Emerging market funds saw outflows as investors flocked to safer assets that are less exposed to US interest rates.

While the US was kicking its financial problems down the road, financially struggling peripheral European states were facing up to theirs through unpopular austerity measures. Deflationary concerns prompted the European Central Bank (ECB) to cut interest rates in October - a show of intent but probably of no great impact in the real economy. 

As the year progressed, economic activity stabilised and even accelerated in some parts of Europe. Half a million jobs created in the UK in 2012 helped to kick-start economic activity. 

The better economic outlook had already begun to feed into higher house prices when the Bank of England’s Funding for Lending scheme, which is designed to encourage banks to lend more, and the Government’s Help to Buy programme injected some more impetus into the market.

2013 has seen some constants. The global currency war continues, the EU still lacks political union and the developed nations are considerably more in debt than a fourth year university student with a taste for fine dining. Putting these bigger picture issues to one side, individual companies have, by and large, exceeded investors’ expectations, beating earnings estimates and growing businesses.

During the 11 month period to November 29, the FTSE 100 increased by 12.8 per cent whilst the Wealth Managers Association Balanced Index increased by 13.2 per cent. The returns on equities outstripped all other major asset classes.

As many developed stock markets trade near all-time highs it is natural to be concerned for future returns. One thing is for certain; as we prepare for Christmas 2013 we are on a lot firmer footing than we were at this time last year.

gary.welford@brewin.co.uk

Gary Welford is an assistant investment manager at Brewin Dolphin.

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