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Where—and Where Not—to Invest in 2013: Morgan, MFS Experts

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The holiday season is just around the corner, but the hectic final weeks of 2012 will demand that investors pay attention to rebalancing their portfolios before they can start enjoying the festivities.

In media briefings this week in New York, investment analysts from both Morgan Stanley Wealth Management and MFS Investment Management gave their outlooks for opportunities in 2013 now that the U.S. elections are behind us and fiscal cliff fears are looming ahead.

“For both sides in Washington, no one wants to be blamed for a recession that would occur if there’s gridlock in the lame duck session,” said political economist Tom Gallagher, principal of the Scowcroft Group and member of Morgan Stanley’s Global Investment Committee. “And there’s still the issue of the debt limit. There will be a deal, but it will be a difficult process.”

To be sure, the wrangling in Washington along with uncertainty about Europe and China will all have a powerful effect on the markets in 2013. That begs the question of where–and where not–to invest next year. Here’s what the experts have to say.

(Read Deficit Reduction Deal: 3 Dueling Plans to Achieve It at AdvisorOne.)

Where to Invest in 2013

U.S. Equities: Billionaire stock guru Warren Buffett may play bridge with Microsoft founder Bill Gates, but that doesn’t mean that Buffett buys any MSFT stock. Why not? Because Buffett doesn’t follow the Tech sector and never has, explains David Darst, Morgan Stanley’s chief investment strategist.

Darst’s point is that investors should invest in what they know, and for U.S. investors, that certainly means the persistently overlooked U.S. equities market. Morgan Stanley continues to overweight U.S. equities, with a capitalization preference for large caps and a style preference for growth.

Global Gorillas and Dividend Aristocrats: Morgan Stanley Deputy Chief Investment Officer Charles Reinhard 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–and “dividend aristocrats”–solid financial companies and utilities that have a longtime track record of regular dividend payouts.

Similarly, MFS Investments President and CIO Michael Roberge likes global equities over bonds, even though spooked investors keep shoveling their money into fixed income.

“The yield you can get from equities is substantially higher than the yield you can get from fixed income,” Roberge says.

Investment Grade Corporate Bonds: The Federal Reserve along with other central banks is continuing its policy of monetary ease for the foreseeable future, which is forcing yield-hungry investors into higher risk corporate credit.

Morgan Stanley prefers investment grade corporates over high yield, and for investors who insist on getting into high yield bonds, Senior Fixed Income Strategist Jonathan Mackay recommends double-B rated bonds and not single Bs.

“Of the two credit asset classes, we have a slight preference for investment grade, which in our view, is less price constrained than high yield and should remain more stable if volatility picks up,” Mackay writes in a November comment.

MFS Investment Management Chief Investment Strategist Jim Swanson, meanwhile, has about 17% of his own portfolio invested in triple-A rated bonds. Sure, some people might say that triple A credits are overvalued, but they’re also a good way to sustain shocks, Swanson says.

Where Not to Invest in 2013

Latin American Equity: In a study of asset class performance in 2012, Morgan Stanley Chief Investment Strategist David Darst tells the story of the world’s most overpriced asset classes with a chart showing the investments that are most ripe for a reversion to the mean.

No. 1 on Darst’s list? Latin American equities, as defined by the MSCI Latin America index, a popular emerging markets index. The index’s compound annual growth rate for 2002 to 2011 is up 18.9%, while the asset class total return for 2011 was down 19.2%. In comparison, the S&P 500’s 10-year CAGR was up 2.9% and its total return for 2011 was up 2.1%.

Gold: Despite the global economy’s troubles, the world is unlikely to come to an end any time soon. That means investors who hoard gold are in for a rude awakening when the precious metal reverts to its mean, Darst says.

Indeed, on his chart of overpriced asset classes, Handy & Harman spot gold holds the No. 2 spot, just after Latin American equities, at a 10-year CAGR of 18.8%.

Sure, there’s a place for gold in a portfolio if an investor believes there is no safer haven–but betting a lot on gold is truly a case of gilding the lily. “We’re gold bulls but we’re not gold bugs,” Darst says.

TIPS: The bond market has shown no surge in inflation expectations ever since the Fed announced its third round of quantitative easing.

“The breakeven rate between five year TIPS (inflation-linked securities) and five-year US Treasury spreads initially jumped when the Fed announced QE3, but is little changed since,” writes Morgan Stanley Chief Fixed Income Strategist Kevin Flanagan in a November analyst note.


Read Deficit Reduction Deal: 3 Dueling Plans to Achieve It at AdvisorOne.