Which sectors did best in 2012?

Investing hasn’t been easy in 2012. The economic gloom both in the UK and abroad has barely lifted despite a brief respite during the Olympics. Interest rates have remained at record lows, while the UK economy experienced a double-dip recession and sovereign debt problems continued in the eurozone. However, it hasn’t all been bad news for investors. It was certainly possible to make money in 2012.

Bonds: Greek debt soars

Corporate bonds performed well during the year and proved popular with those wishing to steer clear of equities but make a better return on their money than they could with cash. According to the Investment Management Association (IMA), the two bestselling sectors from 1 January to 31 October 2012 were corporate bonds and strategic (high-yield) bonds. The IMA sterling corporate bond sector generated a return of 12.9% over the year.

Traditionally, government bonds, or ‘gilts’, are thought to provide a safe haven in troubled economic times. But with yields at record lows, many investors have instead opted for corporate bonds. Meanwhile, according to Bloomberg, investors brave enough to snap up junk-rated Greek sovereign bonds in January enjoyed an 80% return on their investment – 20 times more than that generated by German bunds.

Equities: impressive rebound

Despite the economic difficulties facing the UK and the US, equities performed well in 2012 compared with a very muted performance in 2011. The S&P rose by 16%, while the Dow Jones picked up by nearly 9% and the FTSE 100 gained just under 10.6%.

European stocks were among the best performers in spite of the eurozone’s debt problems. The French CAC 40 rose by 20.4% in 2012 while the German Dax increased by an impressive 25.3%. Elsewhere in the world, the Mexican and Brazilian indices were also strong performers, up 19% and 5% respectively, while in the Asia-Pacific region the Japanese Nikkei gained 24% during the year and the Hong Kong Hang Seng 27%.

Minnows put on growth spurt

Smaller companies are often seen as a riskier investment than their larger peers, but last year they were one of the best-performing assets. According to data from Morningstar, the IMA UK Smaller companies sector delivered an average return of 16.43% in the year to November.

In a list of the top ten performing funds in 2012 for the year to December produced by Morningstar for Fund Strategy, two of the best performing funds were smaller company funds – Fidelity UK Smaller Companies came in at number two, gaining 39% over the year, while the River & Mercantile UK Equity Smaller Companies was at number nine with a 34% gain.

Over all, UK companies were the place to be, as six of the top performing funds were UK all-companies funds. The top performer was the Standard Life UK Equity Unconstrained fund, which delivered a return of 41% over the year.

Property: not all doom and gloom

While the UK residential property market may remain in the doldrums, among the investment trusts, property outperformed. The two best-performing funds were the Economic Lifestyle Property trust, which invests in UK property and delivered a 128.6% return over the year, and the Carpathian Trust, which targets European property and generated an 85% return.

Commodities struggle

It was a tough year for the commodities sector, which was hit by fears of a ‘hard landing’ in China amid slowing growth prospects for the economic powerhouse. The Thomson Reuters Jefferies CRB commodities index finished down 3% for the year even after recovering some ground from heavier slides earlier in the year. Gold ended the year up 2%, but below its high of around $1,793 an ounce recorded in September.

The best bets for 2013

How much longer can the corporate-bonds party continue in 2013? According to Ruth Sullivan in the Financial Times, some investors think the sector is overpriced and already in a bubble, due to the large numbers who have piled into the funds over the past few years. Others believe that these fears are greatly exaggerated.

Andy Gadd, head of research at Lighthouse Group, warns in The Independent that many corporate-bond funds are becoming “increasingly unwieldy and facing liquidity issues in the future”. He also cites inflation as a worry (it tends to depress bond prices) and the fact that, to deliver good levels of income, managers may have to take more risks with underlying credit quality. Our current view would therefore be to steer clear of bond funds in 2013.

Elsewhere, the global outlook remains gloomy, with the eurozone’s sovereign-debt problems still unresolved and the fiscal cliff looming in the US. This continues to make gold an attractive investment, especially at current prices.

We also favour European and Japanese equities. Despite their strong performance this year, European stocks are still relatively cheap, especially compared to US equities. Meanwhile, the Japanese prime minister looks set to embark on a programme that could set the scene for a big Japanese stocks rally, and prospects for the US look a little brighter too in 2013 (see our cover story for more: The investments our experts would buy for 2013).

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