2013 Market Outlook and Top Investment Themes
While we are optimistic about the prospects for continued growth in the U.S. economy (albeit sub-standard growth from a historical perspective) and for the stock market overall for 2013, we remain concerned that many of the same headline risks that were in place heading out of 2012 may still prove to be headwinds in 2013. Specifically, our overriding concerns include, but are not limited to, pervasive and lingering debt problems in Europe (Ex. Greece, Spain and Italy) and their implications on the future of the EURO, the depth of the recession in Europe, lingering difficulties in creating new and lasting jobs domestically and uncertainty related to the ability of our two party political system in the U.S. to work together and create immediate, and lasting, fiscal reform. Decisions with respect to Fiscal Cliff – Round 2, related to necessary spending cuts (and could lead to sequestration) in March, and future, potential increases to the Debt Ceiling, are critical milestones this year for the economy and for the stock market overall. Should the markets come through these political debates relatively unscathed, it could set the stage for a more robust second half of the year but we would expect periods of heightened volatility until that point in time.
Given the many moving pieces in the complex, global investment puzzle, investors would be wise, in our view, to re-visit their asset allocation strategies to help ensure that they have the diversification in place to withstand potential periods of heightened volatility as well as the breadth of asset classes and sectors to help deliver risk adjusted growth opportunities.
With all of these points in mind, we suggest the following portfolio management ideas for careful and thoughtful consideration remembering that any investment portfolio should be custom tailored to an investor’s specific financial goals, income needs, investment timeframe and tolerance for risk.
Take Advantage of Building Momentum in Global Real Estate
We believe that the downturn in residential real estate has bottomed and that there is a building momentum with respect to the housing recovery in the U.S. and overseas. As a result, the Real Estate Investment Trust (REIT) asset class, particularly residential and health care REITS in the U.S., the sub-sector of Homebuilders, and international REITs, and related international real estate investment strategies, are worthy of strong consideration.
Add International Equities Selectively Back into Growth Portfolios
Despite the headline risks that still exist on the continent, and the recessionary pressures that will continue to plague European markets, we believe that selective growth opportunities still exist in Europe, primarily in Northern Europe and the specific country of Germany, and other developed and emerging markets (Ex. China) outside of the U.S. in general, for investors in the New Year.
Find Pockets of Opportunity in Non-traditional Asset Classes and Sectors
Investors should continue to consider adding a wide range of asset classes, in an effort to find pockets of attractive risk-adjusted return opportunities, as we continue to do at Hennion & Walsh, to their respective portfolio management processes given the expected low economic growth environment that is expected across the globe, and the many global uncertainties that exist, in 2013.
Bonds may be Boring, but they are also often Effective
It has long been our contention that, for income oriented investors, bonds can provide for a dependable and consistent stream of income, and principal protection when held to maturity. Bonds, whether they are Municipal, Government or Corporate bonds, can also provide for compounded growth opportunities when the income received from the bonds is reinvested.
Additionally, for growth-oriented investors, fixed income securities can provide investors with downside protection and diversification within a growth portfolio especially in a highly volatile market where additional, measured, short-term flights to quality are likely.
In our view, investors should be careful not to miss out on the income and diversification opportunities offered by Bonds by trying to time future, potential changes in interest rates. History has shown us that trying to time the market, or time interest rate increases or decreases, is often an exercise in futility. While allocations to Bonds may vary based upon market conditions and investor objectives and risk appetites, Bonds can still find a home in most investment portfolios throughout most market cycles.
Embrace the Investment Potential of Precious Metals
We tend to view investments in precious metals, gold in particular, not only as a potential inflation hedge – recognizing that shorter term inflation forecasts remain muted presently – but also as an equity market volatility hedge – the latter in a similar fashion to the way that investors traditionally have gravitated towards fixed income investments (i.e. U.S. Treasuries) when equity markets are volatile, or depressed. These same investors now seem to be increasingly looking to precious metals to help not only from a diversification standpoint but also to assist with total return potential given the record low interest rate environment that fixed income investments find themselves within currently in the U.S. Hence, it is our contention that a client risk tolerance/investment objective appropriate allocation to precious metals is worthy of consideration for 2013.
Disclosure: Hennion & Walsh Asset Management currently has allocations within its managed money program consistent with several of the portfolio management ideas for consideration cited above.