Investment - Articles - What’s Next in 2013: 12 Critical Answers for the Year Ahead

 BlackRock have released a report entitled “What's Next in 2013? 12 Critical Answers for the Year Ahead”, authored by Russ Koesterich, Chief Investment Strategist; Jeff Rosenberg, Chief Investment Strategist for Fixed Income, and Peter Hayes, Head of BlackRock’s Municipal Bonds Group.

  The full report can be found here

 Highlights:

 • Post the fiscal cliff, markets will stay volatile, but opportunities could emerge for long term investors
 • Growth in Europe will remain elusive; China and emerging markets will regain growth trajectory
 • More positive trend for risk assets as 2013 progresses

 Summary of Report:

 Though the worst of the US “fiscal cliff” has been avoided for now, additional fiscal negotiations as well as more reform in Europe mean that market volatility will remain high in the near term. But at the same time, volatility could generate good buying opportunities for investors with long time horizons, according to a market outlook for 2013 released today by BlackRock (NYSE:BLK).

 “What’s Next in 2013? 12 Critical Answers for the Year Ahead,” authored by Russ Koesterich, Chief Investment Strategist; Jeff Rosenberg, Chief Investment Strategist for Fixed Income, and Peter Hayes, Head of BlackRock’s Municipal Bond Group, provides insight into 12 critical questions facing investors in the upcoming year.

 Koesterich, Rosenberg and Hayes do not believe the US economy will re-enter recession in the upcoming year, but note that US fiscal tightening will take place in 2013. Assuming US policymakers reach a deal that addresses unresolved policy issues within a reasonable amount of time, they forecast a US growth rate of around 2% for the coming year.

 Speed bumps to faster growth, such as consumer deleveraging and fiscal tightening, will prevent growth from accelerating too quickly, but they say the economy should get a boost from a strengthening housing market and robust US energy sector.

 Interest Rates on the Rise

 They also project interest rates to gradually rise through 2013— targeting 2% to 2.5% on the 10-year Treasury by year-end. If policymakers failed to reach an agreement on how to handle the spending cuts originally built into the “fiscal cliff” scenario, now postponed, it is likely that interest rates would remain low for longer amid the extended economic uncertainty.

 Looking overseas, the European Central Bank (ECB) avoided the most extreme risks of a banking collapse by pledging to do whatever it takes to save the euro, in part by buying back short-term debt of peripheral countries like Spain, Italy and Greece. However, growth will be elusive until key reforms are enacted after the German elections in the fall, say Koesterich, Rosenberg and Hayes.

 They also believe many of the macro risks holding back countries like Brazil and India are receding, and China’s growth appears to be turning the corner with new leadership and investment as well as easing monetary policy.

 The longer term outlook for China will greatly depend on reform and policies needed to empower the Chinese consumer and to wean it from its traditional reliance on exports and investment led growth toward a more balanced and sustainable growth dynamic. While this will take some time, their view is that China should support—rather than drag—global growth for the coming year.

 Emerging Markets, Credit Sectors Offer Opportunity

 As the year progresses, investors could see a more positive trend for the stock market and risk assets in general, the authors note. Emerging markets are the authors’ favorite long term “theme” for 2013, for faster growth, cheap valuations, lower inflation, and muted volatility. In the US, mega-cap companies look less vulnerable than other styles, particularly mid and small caps.

 In fixed income, the authors suggest migrating toward credit sectors, reflecting the increased risk of “risk free” sectors with the end of the Treasury bull market. High yield still looks attractive, and municipal bonds will offer compelling yields against higher future taxes. Investors also should consider alternative asset classes and strategies to enhance diversification.

 Here is a summary of BlackRock’s “12 critical answers” for 2013:

 1. Fiscal Cliff. A huge policy blunder has been averted (for now), but fiscal tightening will take place. With additional negotiations to come, markets will be volatile, but long-term investors could find buying opportunities.

 2. US Economy. The United States will maintain slow but positive growth, much like in 2012, but should not enter a new recession. Look for stronger growth as the year progresses.

 3. Interest Rates and Inflation. The 10-year US Treasury yield should gradually rise through 2013 to 2%. Inflation should remain in the 2% range unless growth or oil prices spike.

 4. Europe. The European Central Bank (ECB) changed the game by taking the risk of banking collapse off the table. But key reforms are likely a year or more away. In the meantime, growth is elusive.

 5. China and Emerging Markets. China and emerging markets regain their growth trajectories in 2013, helping cushion any weaknesses in the United States and Europe.

 6. Risk-On/Risk-Off Redux? Markets are likely to remain volatile early in the year, but should respond more to fundamentals as clarity emerges.

 7. US Stock Market. While risks are elevated and valuations are relatively high, we still see opportunities, particularly in US mega caps.

 8. Global Stocks. Emerging markets offer faster growth, cheap valuations, lower inflation and relatively muted volatility.

 9. Fixed Income. What used to be “risk free” (i.e., Treasuries) has actually become risky. Over the long-term, we suggest migrating toward credit sectors.

 10. High Yield Bonds. Investors should consider diversifying their exposures in high yield to include loans and secured credit. The asset class continues to offer compelling yield and return potential, and default rates remain low.

 11. Municipal Bonds. Municipal bonds offer compelling taxable equivalent yields in the face of higher taxes. Munis are unlikely to lose their tax exempt status any time soon.

 12. Volatility. Alternative asset classes and strategies are increasingly mainstream and offer the opportunity to enhance portfolio diversification.