Best 5 Investment Picks for 2013

Stocks, not bonds, will likely feature as the best investment picks for 2013.

Over the course of the fourth quarter of 2012, AdvisorOne kept an eye out for where investors should put their money next year, and one thing is clear: Investors seeking yield–isn’t everybody nowadays?–will find more joy in equities than in fixed income, according to Wall Street’s top financial analysts.

“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,” says the Bank of America Merrill Lynch Global Research team in a comment published on Dec. 11.

Both BofA-Merrill and S&P Capital IQ predict that the S&P 500 Index will hit the 1,600 mark in 2013.

Where are the best stocks to be found? The Consumer Discretionary and Consumer Staples sectors offer access to the growing middle classes in emerging markets. The Health Care sector also looks to be strong for 2013, and should see gains now that President Barack Obama’s Affordable Care Act is a reality. For investors who want equity exposure without buying individual stocks, mutual funds and exchange traded funds can also lead to yields in these sectors.

“Next year, we think it’s all about the consumer,” says Brian Peery, co-portfolio manager of the Hennessy Cornerstone Mid Cap 30 institutional fund (HIMDX). “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 consumers may be buying goods at Pier 1, but they’re not investing in Pier 1 stock. “Retail investors will get back into the market when interest rates go up,” he says.

Judging from the best five investment picks for 2013 below, uncertain investors might want to take the plunge into stocks before that happens.

1) U.S. Housing

Peery, of Hennessy Cornerstone, likes the housing subsector within the Consumer Durables sector. Specifically, he names U.S. homebuilders including Standard Pacific (SPF) and KB Homes (KBH). Year-to-date total returns as of Dec. 12 came to 114% for SPF and 129% for KBH, according to Morningstar.

BofA-Merrill Lynch’s researchers lend support to Peery’s picks, noting in a comment published on Dec. 11 that U.S. home prices are expected to rise 3% in 2013. This rise would add 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,” the researchers write.

2) Global Consumer

At separate media briefings in New York on Nov. 13, both Morgan Stanley Chief Investment Strategist David Darst and MFS Investments President and Chief Investment Officer Michael Roberge mentioned U.S.-based Johnson & Johnson (JNJ) as a company with U.S. headquarters which offers access to three fast-growing markets: consumer staples, health care and emerging markets.

Similarly, Morgan Stanley Deputy CIO Charles Reinhard thinks global equities are currently unloved and under-owned, and he likes what he calls “global gorillas”– consumer-sector companies such as Pepsi, Tesco and Nestle that sell a lot of products to the growing middle classes in the emerging markets.

The Consumer Discretionary sector has an overweight recommendation from S&P Capital IQ’s U.S. investment policy committee as of Dec. 11, with the sector up 20.5% as of that date.