* Shanghai equities dominate investors top picks
* Japan equities and other BRICs tipped to outperform
* Return to the euro periphery on many investors' minds
By Mike Dolan
LONDON, Dec 21 (Reuters) - With a whiff of global
recovery in the air and central bank liquidity abundant, investors in 2013 are
packing their bags for China, fellow 'BRICs' Brazil and Russia, long-dormant
Japan and even some Mediterranean sun.
Of course, seeking consensus on the top country
destinations for the year ahead is hardly an exact science.
Often the simplest game is to avoid what did best the
previous year, look at the subdued valuations of laggards and bet on a catch-up
depending on the economic cycle. Rank underlying economic growth rates, factor
in policy shifts and you're away.
And after five years of stomach-churning global crises,
the more conservative western money managers won't even think of leaving home
without at least some basic 'security checks' - let alone set off for exotic
new frontiers.
So the basis of most 2013 forecasts are the pretty
critical assumptions that the euro won't collapse, the United States will dodge
its looming "fiscal cliff" of tax and spending crunches, and that
China's economy has averted a nosedive in growth.
If none of that sounds an alarm, and you don't want to
hunker down at home, then this year's tidal wave of central bank liquidity and
money- printing from central banks in Washington, London, Frankfurt and Tokyo
is waiting to be surfed.
BULLS AND CHINA
Reuters global stock market polls yet again tell a story
of BRIC rebirth. After two years in which the stock markets of the four
emerging giants underperformed even those of bailed-out Greece, Ireland,
Portugal, Italy and Spain - despite vastly superior economic growth rates - the
old ploy of hoovering up what's been beaten down seems unshakeable.
China's long-suffering Shanghai Composite - one of the
few major bourses still in the red this year, down 25 percent from early 2011
and still less than half its 2007 peak - is easily the favourite destination
for money managers, with median forecast gains of 17 percent.
In separate Reuters poll this week of some 55 major asset
managers worldwide, Shanghai was also the top emerging market pick for more
than two-thirds of respondents.
"From a valuation perspective and given the turn in
the cycle, the Chinese equity market - surprisingly a massive underperformer
this year - is the one that stands out," said Philip Poole, Head of
Strategy at HSBC Global Asset Management.
Frustrated China bulls, perhaps unsurprisingly, are keen
to see the gradual rebalancing of the world's No. 2 economy from exports to
consumption show through in the Shanghai markets.
"This is a market that can turn on a sixpence and I
would be very surprised if 2013 isn't a much better year after an 'A' share
bear market that has lasted over three years," Anthony Bolton of
Fidelity's China Special Solutions fund told clients.
Mumbai's Sensex, Sao Paulo's Bovespa and Moscow's RTS are
also among the top five tips in the Reuters poll, with 14-15 percent gains
forecast next year.
That was also this case this year, however, and none have
ended up in the top five best performers. All except Brazil finished 2012 in
the black in dollar terms but they mostly underperformed "safer"
markets closer to home, with even Wall Street and Frankfurt racking up meaty
double-digit advances.
Long-standing BRIC bears have also yet to throw in the
towel.
Deutsche Bank's emerging market equities strategist John
Paul Smith reckons China will continue to disappoint with "structural
shortcomings ... too obvious for foreign investors to ignore". He remains
underweight China, Brazil and Russia, favouring Turkey, Taiwan, Mexico and
Poland instead.
The latter two also found favour in the Reuters poll,
with strong returns forecast on the Mexican peso and Warsaw stocks.
TOKYO ALERT
But perhaps the surprise package in the New Year's top
five is Japan's Nikkei index, a view this week's election win for the Liberal
Democratic Party is likely to reinforce given its pledge to step up the fight
against domestic deflation.
Even Jim O'Neill, the Goldman Sachs Asset Management
chairman who coined BRIC acronym a decade ago, sees Japan as 2013's best
performing equity market, although he stressed hedging the yen due to the
pivotal role a significantly weaker currency is likely to take in reviving the
economy and market.
"There's quite a widespread market belief that if
the yen weakens, one wants to own the Nikkei and obviously with an export
orientation," he told clients.
"But ... if the yen weakens because of new domestic
fundamentals, and investors believe that this has a higher probability of
working, then presumably there will be even bigger domestic Japanese equity
plays to focus on."
O'Neill's top picks still include China and Russia, at
numbers two and three respectively. But he then sees Mediterranean sunshine in
the form of Spain and Italy - behemoths of the battered euro periphery.
The European Central Bank's August pledge to intervene,
and steady progress by euro governments in advancing tighter fiscal and banking
union within the bloc have effectively removed the risk of a euro collapse,
transforming these markets' prospects.
While elections in Italy and Germany next year might give
pause for thought, the ECB's monetary support and backstop bond-buying
programme
- plus global recovery prospects and an easing of local
fiscal drags - are encouraging investors to return.
Italian stocks returned 10 percent this year, although
that was only a third of German gains. Spanish shares just crept into the
black.
More than half the fund managers polled by Reuters opted
for European equities within the developed world, at least 50 percent of whom
going for the beaten-down euro zone periphery.
Many also feel there's juice still left in the big
government bond markets of Spain and Italy despite a recent rally. Over 50
percent of the 32 respondents in the Reuters poll opted for euro government
bonds as their sovereign debt pick for 2013, with three quarters of them
specifying Italy and Spain.
"European assets strike back," declared Societe
Generale strategist Alain Bokobza and team, whose top trades for 2013 involve
buying the EuroSTOXX 50 against the U.S. S&P 500 and buying Spanish debt
versus low-risk German bunds.
WILD CARD
Of course, there's always a wild card - usually for the
very brave. As speculation grows of a market-friendly replacement for ailing
populist President Hugo Chavez, Venezuela's tiny stock market was the white-
knuckle bet of 2012.
If you could even get in there, and skirt the risk of
nationalisation or even police raids on currency brokers, it would have tripled
your money in dollar terms since January.
For the less adventurous traveller, local bourses in
Turkey, Poland, Estonia and Germany made up the rest of this year's Top Five,
with hefty dollar gains of 38-60 percent.
If you prefer MSCI's country benchmarks, Africa muscled
its way onto the map with more than 50 percent gains in Kenya, Nigeria and
Egypt.
Electoral risk or the threat of political violence were
clearly no deterrents this year.
Portuguese and Greek 10-year government bond returns of
around 80 percent in 2012, were up there with the big speculative equity bets
of the year as the ECB rode in.
Losses of 50-60 percent in politically volatile Ukraine
showed what can happen when things go wrong in small troubled economies,
however, as did similarly poor returns in Cyprus - likely to become 2013's
first recipient of a euro zone bailout
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