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Outlook: Cautious optimism prevails in harsh macro-risk environment

Bond markets trounced equities and M&A last year as central bank intervention and low global rates spurred a bull run in fixed income. However, as 2013 kicks off there are faint whispers of a pick-up in IPO and acquisition activity, so long as confidence is not undermined by an ugly mix of macro risks. That’s a big hope.

As markets reopen in 2013 they have either fallen dramatically in the first few days on the failure of US politicians to resolve the fiscal cliff or are enjoying a relief rally on an eleventh-hour resolution.

Whichever outcome is playing out, and the hope is the latter, global markets will this year continue to be held hostage by new and lingering macro risks, extending investors’ risk-on/risk-off mentality.

"For the past three years, intermittent fears of US recession and European collapse have put markets into a risk-on/risk-off yo-yo," says Peter Gunning, global chief investment officer of Russell Investments. "This is likely to continue."

Indeed, central bankers have done what they can to eliminate so-called tail risk, but if they have succeeded there, they have thus far failed to find a solution to firing the engines of economic growth and successfully de-levering over-indebted economies.

"This argues for a risk-off (periodic growth disappointments), risk-on world (liquidity injections) to continue as far as the eye can see," says Jim Reid, managing director and global head of fundamental credit strategy at Deutsche Bank in London.

He adds: "2013 could be a decent year for markets but with huge risk-off moments – it’s all about politicians, central bankers and growth for 2013."

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