2013: Next year could be “lucky ’13” for cautious, savvy investors, BAML says
A cloud of uncertainty is likely to overhang the markets through a painful and protracted resolution of the US fiscal cliff, according to the outlook for 2013 published by BofA Merrill Lynch.
The bank’s analysts expect the year ahead to be “lucky ’13” for cautious, savvy investors, as the beginning stages of a great rotation in the markets create opportunities for cyclical and undervalued asset classes poised for recovery.
“This time last year, the risks to global growth were to the downside as the European debt crisis, China hard landing fears and the U.S. fiscal cliff clouded the economic outlook,” said Michael Hartnett, chief investment strategist at the bank.
He added: “For 2013, we expect the resolution of fiscal policy issues, another year of accommodative central bank actions and improving corporate profits to skew the macro and market risks to the upside.”
BofA Merrill Lynch outlined 10 macro calls on which they are basing their 2013 outlook.
1. The global economy grows 3.2%, gradually improving through the year, led by China and the US. Resolution of the fiscal cliff in the U.S. and successful negotiation of aid to Spain, combined with high liquidity and low commodity prices, should support a gradual improvement in global business and consumer spending through the year. By the end of 2013, growth is expected to rise to 2.5% in the US and 8% in China.
2. Fiscal austerity in the US and Europe offsets monetary stimulus from central banks. Monetary easing may not be enough to offset fiscal contraction in the first part of the year. Fiscal austerity in Europe and in the US is likely to be a drag on growth.
3. The US housing recovery builds momentum. US home prices are expected to rise another 3 percent in 2013, adding to the 5% gain in 2012. Housing starts could increase by more than 25% and a 3.5% average annual appreciation over the next 10 years should stimulate jobs to construction and related sectors such as furniture, building materials and financials.
4. Flares, not wildfires in Europe. With support to Spain from the European Central Bank, the European economy should stabilize as the year progresses. Despite a series of episodic flare-ups of the ongoing crisis in Europe, the big tail risk of a Eurozone breakup has likely passed.
5. China should lead emerging market growth. Against a backdrop of subdued growth in developed markets, GDP growth in emerging markets is expected to recover to 5.2%, led by the BRIC economies, particularly China. However, rising inflation could leave emerging market policymakers with little room to ease.
6. Global equities should be the best-performing asset class. Powerful policy support, reasonable valuations and receding tail risks should help make global equities the best performing asset class in 2013. The US, European and Asian equity markets could see gains of 10% to 16% next year, with the MSCI AWI reaching 370 and the S&P 500 Index reaching a new all-time high of 1600 by year-end.
7. Interest rates and currencies. The US dollar and Euro could rally on the global recovery and greater fiscal clarity, pushing the yen lower and emerging market currencies higher.
8. High yield and emerging market bonds should outperform corporate credit. On the heels of record-low yields in 2012, US investment-grade corporate bonds are likely to offer scant returns of 1.6% in the year ahead, but high yield bonds could return up to 7% and emerging market bonds could return 10.1%
9. Fixed Income: Government bond yields should rise modestly. G3 central banks are expected to maintain their zero-interest rate policies. Government bond yields in the US, UK and Germany are expected to rise modestly to 2.0, 2.5 and 1.5%, respectively, translating into total returns for major government bond markets of roughly -3% to +2%.
10. Commodities: Gold could rise to $2,000 per ounce. Large-scale policy easing by the US Federal Reserve and European Central Bank positions gold as a useful hedge against global macro and inflation risks.