2012 is slowly drawing to a close. What’s done is largely done. In many ways, 2012 has been a good year for investors, especially those who focused primarily on bond markets. But this is not how it started. We entered 2012 in a state of trepidation as concern over the euro and sovereign bond markets in Europe was still at elevated levels.

The question remains – where to from here?- David Curmi

We were in ‘code red’. Planners were desperately contemplating scenarios that included a break up of our beloved euro – us included. This scenario had a low probability scenario attached to it, but if it did occur it was such a high impact event that nobody in their right mind could afford not to have a plan as to how to deal with the ensuing carnage. Yet politicians took us to the brink and back again and today we sit more comfortably with the euro. Comfort is a dangerous luxury though, and complacency needs to be avoided at all costs. The stresses remain.

Yet, how did 2012 turn out for investors.

There are clear winners and losers over this period and perhaps the themes are not difficult to identify. Generally speaking, it has been risky assets that performed better than safe haven assets but more specifically it has been those markets that were suffering from extreme levels of risk at the start of 2012 that have performed best. The flag bearer in this short list is the German equity market which recovered strongly as politicians and central bankers papered up the cracks that were threatening the euro break up.

Additionally, the German index contains a large number of big world class industrial companies within its confines. As confidence that world economies may not suffer a double dip recession rises, these companies should be prime beneficiaries as they are extremely well placed to benefit from stronger world demand.

Unfortunately, the Malta Stock Exchange has not been a rewarding place to park your money, in government bonds but especially in equities. The numbers speak for themselves.

The big theme in 2012, however, has been that of the flight of capital in search of income. While in the earlier part of 2012, bond investors were perplexed by the issue of whether inflation would kick in at some point, or by the real prospect of an uncontrolled default in Greece or one of the other periphery countries, as the year went by it became clear that the former was a red herring while the latter was being managed – just. The combination of these factors together with the ECB conducting two major actions (LTRO and OMT) and almost every other major Central Bank conducting quantitative easing in some format, created the perfect platform to rekindle one of the strongest bull markets in investment grade and sub-investment grade bonds of all time.

Comments from Ben Bernanke that interest rates will be kept low (zero) until unemployment falls to 6.5 per cent from the current 7.9 per cent give further comfort that bond prices are unlikely to turn around and tumble anytime soon. With interest rates expected to remain low for a very extended period of time, the search for income has become one of the biggest investment themes. And this is unlikely to change anytime soon. Investors who have benefited from this free ride are today looking and feeling smug. The question remains – where to from here? This is a difficult one to answer at this point, especially as in some quarters, risks continue to grow and many measures that are today being tried by central banks are taking us into uncharted territory. Territory which, in theory, may bring even harder times upon us.

In the meantime, the need for income grows daily. Despite official figures, inflation is not as low as we are made to believe. This new paradigm is going to require a shift in investors’ theories and a repositioning and reassessment of portfolios and risks.

I wish readers a happy Christmas and prosperous 2013.

www.curmiandpartners.com

Curmi & Partners Ltd is a member of the Malta Stock Exchange and licensed by the MFSA to conduct investment services business. This article is the objective and independent opinion of the author. The value of investments may fall as well as rise and past performance is no guarantee of future performance.

David Curmi is managing director of Curmi and Partners Ltd.