Opportunities for fixed income and equities? (excerpt)On the Trading DeskSM—
By Peter Nulty
Dr. Brian Jacobsen, CFA, CFP®; John Manley, CFA; and James Kochan, capital markets strategists with Wells Fargo Funds Management LLC, sat down with Peter Nulty to discuss what opportunities await fixed-income and equity investors in this excerpt of On the Trading DeskSMfrom January 18, 2013. The interview is based on the outlook paper, “Love risk by managing it.”
Brian, what’s your outlook for growth in 2013?
Jacobsen: What we might see is a hockey stick, as far as the pace of growth, where it’s fairly slow in the first half, and then accelerating towards the second half. One of the big features of the tax deal was the bonus depreciation given to businesses. It’s going to, I think, encourage them to make more investments in property, plants, and equipment, which could be very beneficial to longer-term growth in the U.S.
Jim, how would you distribute a fixed-income portfolio?
Kochan: If it were for a municipal portfolio for an investor in a high tax bracket, I would want to focus on single-A and triple-B credits, underweight triple-A and double-A because quality spreads are still very wide. You get a good increase in yields by going into single-A and triple-B credits, and maybe even a small allocation to the double-B sector. That would be for a municipal bond portfolio. On the taxable side, again focusing on corporates primarily, triple-Bs in the investment-grade arena and high yields, perhaps underweighting the weakest of high yields at this stage of the cycle, that is triple-Cs and weaker, because that is where we find income.
John, what allocations do you see for an equities portion of a portfolio?
Manley: Well, there are three areas I’d overweight. First of all, healthcare, I think we have more spending on healthcare coming regardless of what else happens. I think the valuations are not as high as they can be, and I think there is still are a great deal of flexibility for cash flow. I like technology. I don’t think the technology cycle is finished for most corporations. I think we’re in a situation where valuations have come down as the stocks have come down. You don’t get a chance to buy these stocks near market multiples very many times. You’re getting one now. And finally, I like energy. I think that a lot of things will change in energy. I think in the U.S. there will be great developments with natural gas. I think we’re going to see a situation where you’re going to have to spend money to develop infrastructure. Outside the U.S., I think the high cost of finding and developing fields is going to keep the price of oil high for a longer period of time than many people expect right now.
Brian, for investors, how would you allocate assets between the fixed-income and the equities portion of a portfolio?
Jacobsen: In general, we’ve been recommending over the last few years to be overweight equities as part of your overall portfolio relative to fixed-income. Now, for this upcoming year, I think that it does depend upon your investment horizon. If you are looking at a longer-term investment horizon, you can probably afford to take on a little bit more equity risk just because I think longer term that’s where more of the total return for a portfolio might come from. Shorter term, you could be looking at having a little bit more agile portfolio as far as some of these bigger political events approach; maybe look at adding some of the fixed-income exposures. But in general, the allocation for short-term investors versus long term, I think could be pretty similar for the upcoming year.
Well, gentlemen, that brings us to the end of our program nearly, but we would welcome parting thoughts. John?
Manley: Just remember how much things can change, things can improve from where we are right now, that’s something investors have to remember.
Thanks a lot, John. Jim?
Kochan: I think the fundamentals that drive interest rates like Federal Reserve policy, moderate economic growth, and low inflation still suggest investing for income, not safety, in 2013.
Jacobsen: Even though we have low growth, it’s still growth. I think momentum is beginning to shift towards faster growth. Investors who are willing to invest for growth, I think, could be rewarded.
Well, that is it for today. John, Jim, Brian, thanks for joining us.
All: Thank you.
The views expressed are as of 1-23-13 and are those of Peter Nulty; Chief Portfolio Strategist Brian Jacobsen; Chief Equity Strategist John Manley; Chief Fixed-Income Strategist James Kochan; and Wells Fargo Funds Management, LLC. The information and statistics in this report have been obtained from sources we believe to be reliable but are not guaranteed by us to be accurate or complete. Any and all earnings, projections, and estimates assume certain conditions and industry developments, which are subject to change. The opinions stated are those of the author and are not intended to be used as investment advice. The views and any forward-looking statements are subject to change at any time in response to changing circumstances in the market and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally, or any mutual fund. Wells Fargo Funds Management, LLC, disclaims any obligation to publicly update or revise any views expressed or forward-looking statements.