Uncertainty over Italy’s elections relevant risk factor, says Merrill’s Bill O’Neill

The outcome of political elections to be held in Italy at the beginning in 2013 to appoint the new prime minister is still very uncertain, and is weighting as a relevant risk factor on financial markets.

Yet, any newly elected government is expected to work to keep the commitments taken by Italy with its European partners, in particular on debt reduction, according to Bill O’Neill, chief investment officer for Europe, Middle East and Africa (EMEA) at Merrill Lynch Wealth Management.

Speaking in London during a press event, O’Neill shared a cautious optimisms over the financial outlook for the eurozone, emerging markets and United States.

Political risks, which include the negotiation of a deal over the US fiscall cliff, remain relevant for 2013.

“In Italy, there are still questions unanswered over the involvement of technocrat prime minister Mario Monti (left in the picture) in the future government. The political scenario is open at the moment,” he said.

The chief investment officer defined Italy’s government bonds as “top in the peripheral European region.”

Elsewhere, O’Neill said investors should position for the ‘great rotation’ out of fixed income and into equities that is likely to begin in 2013, as the economic and market outlook for the coming year is brighter.

O’Neill expects equities to outperform fixed-income investments in 2013 and that investors already have adequate grounds to begin reversing their overweight bond positions and underweights in equities.

“The time for a full cyclical rotation away from bonds may not yet have arrived, but equities are now trading at their most attractive level relative to high-grade credit in over two decades,” he said.

As an initial step, O’Neill favours higher-income equities and he prefers companies with proven track records of dividend growth over those that offer the highest current yields

Meanwhile, with a greater emphasis on growth, policy and politics will remain vital factors in the investment environment of 2013.

“Central banks underpinned the advances in 2012 by maintaining ample liquidity and a constructive interest rate environment. These measures should provide a supportive backdrop to next year’s better equities performance,” he said.

Demand and corporate earnings should finally pick up in 2013 as stimulus measures take effect. “China’s growth will tick upwards as recent policy stimulus measures gain traction. India too should fare better next year, with GDP growth expected to jump to 6.9% next year, from a forecast of 5.6% for 2012,” he said.

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