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Prudential analysts forecast positive equities outlook

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Investors can look forward to continuing gains in the equities markets in 2013, according to panel of experts who spoke at a media briefing on Tuesday.

The event, organized by Prudential Financial and held at the Millennium Hotel in New York City, featured a panel of five Prudential economic and markets analysts. The gathering explored the outlook for global economy and markets, including the retirement planning space, for the year ahead.

Ed Keon, managing director and portfolio manager of Quantitative Management Associates, Newark, N.J. said that investors can expect “good performance” from equities, particularly riskier assets, in part because the economy will grow faster than the consensus estimate. Fueling the economic growth in 2013, both in the U.S. and globally, will be a “healing labor market,” vibrancy of home prices and recovering auto sales.

Equity yields, which averaged 15 percent in 2012 and 10 percent over the last several years, should continue into 2013, sustaining a bull market. 

“The worst of the financial crisis is behind us,” he said. “The markets will improve in 2013. And as this happens, investors will shift from extreme risk aversion to a more normal view of risk.

“Riskier assets are now priced more rationally in past years,” he added. “This more rational pricing is good news.”

John Praveen, managing director and chief investment strategist for Prudential International Investment Advisers LLC, noted an usual dichotomy of 2012: weak economic performance and strong markets, the trend being particularly pronounced in Japan, Europe, India and China. Market gains continued despite subpar economic performance because of measures undertaken by central banks to maintain liquidity and ease borrowing rates. He also cited fiscal stabilization steps in the eurozone and a modest GDP rebound in the U.S. and emerging economies as positive trends.

“The factors that drove markets up will continue to be in play in 2013, boosting global stocks by 10 to 15 percent,” said Praveen. “Central banks will keep interest rates low. And we can expect further fiscal stabilization measures in the eurozone and elsewhere.”

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However, Quincy Krosby, chief market strategist at Prudential Annuities, cautioned that Prudential is maintaining a “defensive barbell” strategy in 2013 because of “tremors” in the equities markets that could bring a halt to the rise in market valuations. She noted, for example, that central banks could tighten monetary policy to counteract inflation concerns.

Michael Lillard, managing director and chief investment officer of Prudential Fixed Income, said that low economic growth and low inflation, combined with high demand for pension funds, contributed to low Treasury rates and “declining spreads” across fixed income sectors in 2012. For 2013, he foresees continuing low yields on fixed income assets, due in part to the “cloud hanging over the U.S. economy,” specifically uncertainty as to how Congress will resolve the ongoing fiscal crisis.

He is optimistic, however, about the performance of emerging markets, which should drive up the value of their currencies relative to the U.S. dollar.

“We’re very positive about the outlook for emerging markets,” he said. “We expect to see higher growth rates in these countries. And so their currencies will outperform.”

George Castineiras, a senior vice president of total retirement solutions at Prudential Retirement, was similarly upbeat about the growth outlook of retirement planning in 2013. Now valued at $18.5 trillion worldwide, retirement assets will grow markedly in 2013 and subsequent years, fed by the burgeoning ranks of the baby boomers, the eldest of whom turned age 65 in 2011.

“There’s going to be a lot of [retirement] money in motion in 2013,” he said. “I’m optimistic about the growth opportunities because of the favorable long-term demographics.”

In tandem with the market’s growth, he added, retirement planning in the workplace will also evolve, as employers look to implement 401(k) plans that are a hybrid of defined benefit and defined contribution plans. Many of the new arrangements will boast “auto enrollment, auto investment and auto income” as plan features.

Castineiras added that he is optimistic that the tax-favored treatment of qualified retirement accounts will largely survive the coming battle over tax reform. Legislative action negatively impacting these accounts would likely be limited to high wage-earners, he said.