1) US stocks outperform Emerging Markets, yet again.
Rationale: US corporate profits continue to be the healthiest in the world. EM profits are likely to improve, but the profits rebound might be more muted than many investors currently expect.
2) Inflation remains benign. Gold and commodities underperform.
Rationale: China has tremendous excess capacity, and continues to build more. Although slack in the global economy may be reduced in 2013, the global economy is unlikely to experience either the credit creation or the bottlenecks that are traditionally necessary to fuel a late-cycle inflationary environment that typically fosters commodity or gold outperformance.
3) The Japanese Yen weakens substantially.
Rationale: Japan just recorded their first current account deficit. ¥100/dollar should not be summarily ruled out if that current account deficit expands.
4) A cash-financed M&A wave begins in the US.
Rationale: By hoarding cash, larger US companies have under-invested for future growth. They may start buying growth in 2013 if the economy continues to improve. Small or Midcap stocks appear undervalued (based on EV/EBITDA) relative to their larger cap counterparts in seven of ten sectors.
5) Consensus warms to European stocks in the second half of the year.
Rationale: Relatively easy profit comparisons lie ahead for European companies, and every new cycle begins with easy comparisons. Unfortunately, despite attractive valuations, European corporate fundamentals still appear to be deteriorating.
6) Long-term treasury rates continue to fall.
Rationale: The long-duration “wall of worry” remains very high. Bond portfolios have been consistently short duration relative to benchmark for seven years despite that the 10-year treasury rate has fallen from above 5% to below 2%. Inflows are incredibly strong to shortduration funds. Such overwhelming negative sentiment toward the long-end of the curve argues that long-duration assets are likely to outperform.
7) Non-dollar debt underperforms.
Rationale: Stronger USD might hurt non-dollar returns, and credit spreads might widen as investors realize they have underestimated the risks associated with investing in emerging markets.
8) Hedge funds continue to experience outflows to traditional asset allocation funds.
Rationale: Hedge funds’ combination of high fees, regulatory headlines, and correlated underperformance make traditional asset allocation funds increasingly tough competition.
9) Volatility begins to increase late in 2013.
Rationale: Perhaps the most important factor influencing the long-term trend in equity market volatility is central bank liquidity. Thus, it has not been surprising to us that the VIX has stayed so low because of the huge amount of liquidity the Fed has provided. Our work is starting to suggest that the VIX might begin to increase toward 2014.
10) The American Industrial Renaissance continues
Rationale: Small and mid-cap US-centric industrial and manufacturing stocks are likely to outperform as the companies continue to gain market share because of the combination of closing wage disparities, lower energy and transportation costs, and political stability.
11) Small US banks
Rationale: Smaller US bank stocks are likely to outperform because of the combination of improving household cash flow, continued improvement in housing and construction, improving asset values, and virtually no exposure to the deflation of non-US credit bubbles.
12) The opportunity cost of not owning equities becomes too great for investors to not participate.
Rationale: Equities have outperformed most short-duration fixed-income returns, but the opportunity costs have evidently not been high enough to get investors to move into equities. Given our bullish stance on the equity market, we think that opportunity cost will continue to expand, and investors will finally start to chase equity performance.
13) Short-duration is not a panacea
Rationale: Investors have flooded into short-duration bond funds believing that these funds offer both high yield AND safety. The basic tenets of investing say that risk and return go hand-in-hand, which means that high yield typically comes only with added risks. It is our guess that investors are quite unaware of the risks imbedded into short-duration funds. Trouble could lie ahead.
Monday, December 10, 2012
Richard Bernstein: 13 for 2013
Richard Bernstein of former Merrill Lynch fame has a nice note out on his 13 ideas for 2013. You can read the full note at Richard Bernstein Advisors.
Posted by Bud Fox at 4:17 PM