Market Perspectives - July 2013
2013 midyear outlook: Time to change your focus?
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. Short-term, over the next three months, we think investors may still be rewarded by looking at higher-yielding fixed-income investments as well as growth-oriented equities. While there could be an equity market retreat, we don’t expect that any loss will be deep.
EquitiesGlobal equities still look attractive from a valuation perspective. We think a lot of investors are fearful of outcomes that have a low likelihood of occurring over the next six months to a year. For example, the eurozone is not likely to break up, the U.S. is not likely to go bankrupt, and China is not likely to implode. Those seem to be the negatives that people obsess about. There are also the positives that people might be a bit too excited about. For example, fracking technology may eventually make the U.S. energy independent, but it’s not likely to happen over the next year. Emerging markets economies may raise billions of people into the global middle class (defined as making between $1,000 and $12,000 per year), but that’s likely going to take time. In the interim, some countries may go from emerging to submerging. This is why we urge investors to diversify, but with an eye toward growth. The future might not be as bad as you fear, but neither may it turn out to be as great as you hope.
Value versus growthChoosing between value and growth is like choosing between walking to the store and breathing. Why not both? We think pessimism about the future—of which there is plenty—has contributed to mispriced growth opportunities that nicely blend value and growth characteristics.
Large caps versus small capsLarge-cap companies are probably better positioned for global growth than small-cap companies. That doesn’t mean small- and mid-cap companies should be ignored. However, we think it’s more important to be discerning about the economic exposure of a company rather than judge it solely on its size. Mid-cap stocks may be a bit like the middle child of a family who is feeling overlooked. Perhaps a large/mid blend would be appropriate.
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
Understanding the tableNeutral positioning for equities is the percentage of market capitalization meeting the classification criteria of a broad market index. Because the fixed-income market tends to be dominated by sovereign debt, we chose to represent the neutral weight as 50%. The strategic positioning represents our guidance for investors with a time frame of three years or longer. The tactical positioning in the pie charts below represents our guidance for investors with a time horizon of less than one quarter.