The Pocket Guide to 2013: Themes and Predictions from Industry Pundits
So much research comes out this time of year with many major firms cautiously offering their predictions for the new year that we wondered how they would stack up on the major issues. We’ve parsed through some of the larger reports from Barclays, Bank of America Merrill Lynch, Morgan Stanley, UBS, ING and Wells Fargo to track the top themes and condense it down to some key takeaways. Here are some of their more interesting recommendations on global themes as well as some more local, unique investment ideas that they had to offer.
“Flares, not wildfires” – BofA Merrill Lynch BofA, UBS, Barclays agreed that the area had on the whole seen the worst and was growing safer as turmoil stagnated. Morgan Stanley recently lifted their underweight position and increased exposure to European equities. ING expects troubles to shift to Italy and France.
BofA Merrill Lynch predicts that China should lead emerging market growth in 2013, and Morgan Stanley calls it “one place where growth prospects are relatively compelling.” UBS and others see growth around 8.0% this year. ING cautiously threw in their support: “The recent transition in leadership heightens the chance that growth will be sustained, though it may be more precarious going forward.” –ING
Morgan Stanley says equities are undervalued according to their price to earnings ratios. Wells Fargo believes that consumer spending, government policy and geopolitical events will continue to drive the market up. ING echoed that consumer spending would be a positive game changer, and Merrill Lynch says that equities should be the the best performing asset class.
Many firms like UBS, Wells Fargo and Merrill Lynch agreed that investors should be looking toward higher-yielding alternatives to government bonds. Investment grade corporate debt and securities-backed mortgages were popular, as was emerging market corporate debt. “Investors should refrain from “reaching for yield” by moving lower in credit quality than is appropriate for their risk tolerance,” Wells Fargo said. “Investors focused on income should give significant consideration to income investment vehicles outside of the traditional fixed-income universe, such as dividend equity solutions.”
The only asset class Wells Fargo was overweight in was investment grade bonds (ie Treasuries and mortgage-backed securities) BofA Merrill Lynch stood out as expecting government bonds yields to rise modestly to 2.0 in the U.S., 2.5 in the U.K. and 1.5 in Germany.
It’s still free restaurants, but Morgan Stanley predicts that “Water may be the most important commodity story of the 21st Century as declining supply and rising demand combine to create the “perfect storm.”” Scarcity in major economies such as China, India and Indonesia coupled with urbanization and climate change could make this resource particularly valuable based on the benchmark of the ISE Water Index, Morgan Stanley said. Returns were at 27.8% on this index in 2012.
According to Wells Fargo, rice prices have remained nearly steady for five years, but grain prices have varied wildly. Since it’s hard to nail down a general trend, Wells Fargo recommends diversity across a number of commodities. “Investors looking to exploit the world’s potential long-term growth in food demand should take a broadly diversified commodity exposure that includes agricultural, industrial and precious metal groups,” Wells Fargo said.
BofA Merrill Lynch expected Gold to rise to $2,000 per ounce thanks to large scale easing by the U.S. Federal Reserve and the European Central Bank, but ING sees it around $1,400. Barclays warns to beware of reflation risks, but be ready to buy on price dips toward the 200-day moving average. Wells Fargo says it should do well if the Eurozone continues to hold together. Either way, avoid aluminum and copper where fundamentals look weakest, Barclays said.