2013 investment themes

• The theme of austerity versus fiscal deficits will be a key driver of markets. However, following the the news flow will not be rewarded in the longer run. Markets are moving because of changes in growth. The austerity or fiscal deficit issue will only effect markets if there is a surprise that translates into a change in growth. The most important theme is that credit headwinds will continue to cut growth rates.

• Three speed global economy (from Barclay's) - There will be fast growth in China, slow growth in the US, and negative growth in Europe. This is likely to be the growth theme for 2013 even with a negative print for the fourth quarter in the US of -.1%.

• The new Japan - The declining yen will have a positive impact on exports and on the Japanese stock market. It has been a long time since Japan has been relevant for world growth in a positive way.

• A calmer Europe - While the EU is in recession, we have seen a calmer Europe in the second half of 2012 and this will continue for 2013. This does not change the underlying negative structural problems, but there will be less headline risk.

• The new China growth story - China will move to increased internal spending as a consumer society but it will not be at the pace that will solve other world growth problems. Structural problems exist in banking, state enterprise, labor markets, and the rural to urban migration. These have not really been addressed since the government change in the fall. 

• There is the constant of hope versus fear - The hope that we will go back to a normal recovery versus the fear that we will be stuck in slow growth.

• The growing importance of emerging markets  - We will not go back to the old world of developed markets being a driver and big swings in emerging market performance.

• Type 2 stagnation - Relative economic stagnation with asset price inflation not goods inflation

• The paradox of taxes - Regulation and cost inflation will be on a rise with poor growth deflation. Higher prices not coming form higher demand. Taxes will slow growth and drive prices higher.