Wall Street is bullish on stocks in the year ahead. In 2013, equity analysts believe, the world’s central banks will do their best to force reluctant investors to move their money out of bonds and into stocks.
Skittish investors may believe that the stock market is a place to avoid, but equities researchers are ignoring the noise of headline news and looking at the data. As a result, they’re confident that Washington policymakers will resolve the fiscal cliff as Europe moves past the worst of its debt troubles and global central banks keep liquidity high and interest rates low.
“As we begin to observe evidence that policy is successfully stimulating growth, we expect to see the initial stages of the ‘Great Rotation’ from bonds into stocks later in 2013,” writes the Bank of America Merrill Lynch Global Research team in a comment published Tuesday.
Morgan Stanley Deputy Chief Investment Officer Charles Reinhard is even more succinct: “Global equities are unloved, they’re under-owned, and yet there are good opportunities out there.”
Bonds Bad, Stocks Good
Outside of Wall Street, people keep insisting on putting their money into bonds, where even the riskiest securities are offering lower and lower yields. It will take some convincing, though, before investors will feel good about stocks.
“People are still nervous,” said Neil Hennessy, chairman and chief investment officer with Hennessy Funds. “They’ve lost equity in their houses and retirement funds. But when everyone moves the same way, that’s not where you want to be, especially in a nearly zero interest rate environment.”
Since 2007, $1.12 trillion of retail investor money has flowed into bonds while stock outflows have totaled $399 billion, according to John Linehan, director of U.S. equity for T. Rowe Price, who noted in November that poor market sentiment has weighed on the U.S. large-cap value fund he co-manages even though it was up 10% for the year.
“There’s a huge dichotomy between market sentiment and market performance,” Linehan said. “Investors chase performance for the same reason that dogs chase cars. They can’t help themselves.”
Next year will be a “show me” year, says Michael Hartnett, chief investment strategist for BofA Merrill Lynch Global Research, when investors will watch for signs that an economic turn-around is truly happening.
“In the past five years, interest rates have been cut 443 times and global liquidity has jumped by $10 trillion. We believe 2013 is shaping up to be a ‘show me’ year, in which investors quickly demand to see evidence that policy easing is inducing a self-sustaining global economic recovery,” Hartnett writes in an analyst note.
S&P 500 Index at Historic High in 2013?
Both S&P Capital IQ and BofA Merrill Lynch Global Research call for the S&P 500 index to reach 1,600 in 2013.
“Looking out to 2013, we think the ‘500’ will likely challenge its all-time highs sometime in the first half, possibly reaching 1,600 or more,” writes Alec Young, global equity strategist for S&P Capital IQ.
“Global economic growth is expected to pick up steam in the second half of the year, ultimately surprising on the upside and pushing the S&P 500 Index to 1,600, a new all-time high,” says the BofA Merrill Lynch Global Research team.
Good Luck for Global Equities
“Lucky ’13” will be the theme for global equities in 2013, according to the BofA Merrill Lynch Global Research team, which predicts that global equities will be the best-performing asset class next year.
The research team sees favorable global equity markets ahead due to powerful policy support for easing interest rates, reasonable valuations and receding tail risks. The U.S., European and Asian equity markets could see gains of 10% to 16% next year, they believe.
Similarly, Morgan Stanley Deputy Chief Investment Officer Charles Reinhard, who thinks global equities are currently unloved and under-owned, likes what he calls “global gorillas”–companies such as Pepsi, Tesco and Nestle that sell a lot of products to the growing middle classes in the emerging markets.
U.S. Sector Watch
Overall, Morgan Stanley has added to its already overweight equities position, Reinhard says.
The best sectors for investors next year look to be Consumer Discretionary and Health Care, which both have overweight recommendations from S&P Capital IQ’s U.S. investment policy committee as of Tuesday. Sectors to avoid are Utilities and Materials, which both have underweight recommendations.
Consumer Discretionary is up 20.5% year to date, while Health Care is up 15.6%. Utilities are down 3.8% year to date, while Materials are up 7.2% year to date.
However, Morgan Stanley Deputy Chief Investment Officer Charles Reinhard favors what he calls “dividend aristocrats,” which include utilities that have a longtime track record of regular dividend payouts.
Duke Energy, for example, paid a quarterly cash dividend on its common stock for the 86th consecutive year in 2012.
Meanwhile, co-portfolio manager Brian Peery of the Hennessy Cornerstone Mid Cap 30 institutional fund (HIMDX) likes Consumer Discretionary companies including Pier 1 Imports, Mohawk Industries and Whirlpool. He also favors the housing subsector within Consumer Durables, including homebuilders such as Standard Pacific and KB Homes.
“Next year, we think it’s all about the consumer,” Peery says. “The housing market is rebounding in a low to moderate growth environment. We expect GDP growth of approximately 2%.”
The trouble, notes Peery’s colleague Neil Hennessy, is that while consumers are buying goods at Pier 1, they’re not ready to invest in Pier 1 stock. “Retail investors will get back into the market when interest rates go up,” he says.