Market Perspectives - January 2013
2013 outlook: Love risk by managing it
Asset allocationBy Brian Jacobsen, Ph.D., CFA, CFP®, Chief Portfolio Strategist
Investment horizonsFor investors with an investment horizon of three years or longer, we recommend a strategic overweight to equities relative to fixed income. Over the next three months, we think investors can still be rewarded by looking at higher-yielding fixed-income investments as well as growth-oriented equities.
EquitiesWithin the equity portion of a portfolio, long-term, we think investors should look globally for opportunities. There is no one sector or country that has a monopoly on opportunities. Eurozone and Japanese equities have been battered down, as have Chinese nonbank equities, to the point where we think they represent compelling long-term investment opportunities. In Japan, there is the risk that a rapidly depreciating yen could offset any gains in securities in local-currency terms, so the outlook for monetary policy in Japan will need to be closely monitored. There is also a profound amount of pessimism built into U.S. equity prices. We think all sectors have at least a nugget of investment opportunity.
Value versus growthWe think the U.S. and global economies will grow more rapidly over the next few years than what is embedded in stock valuations across the value/growth spectrum. We tend to prefer mispriced growth opportunities, which are those companies whose growth potentials are underappreciated by the general market. We see many of these opportunities in global health care and technology names. Please note: When it comes to technology, we are not just referring to information technology but rather all those companies that help other companies convert their inputs into outputs in a more efficient way.
Large caps versus small capsA high-quality company is a high-quality company, whether large or small cap. Generally, large-cap companies have easier access to credit markets and global markets than small-cap companies, but that is not always true. There are many large-cap companies that have cash burning holes in their executives' pockets that could lead to imprudent acquisitions. As a result, we think it's also important to focus on corporate governance.
Fixed incomeBased on our economic outlook, we believe that interest rates are likely to remain low for the next year. This presents an opportunity for investors to take on additional duration and credit risk. Provided the economy does not dip into a recession, default rates should not increase, meaning increased yields on higher-yielding debt may provide better income to investors than the lower-credit-risk issues would.
Asset allocation summary table1