The year 2012 was marked by uncertainty in the market and overall economy. Investors weathered the European debt crisis, domestic fiscal cliff fears and a halting US economic recovery. Markets generally climbed a wall of worry to finish with solid, double-digit returns. With 2012 now behind us, investors can look to 2013 for areas of interest for portfolio gains.
Here are few potential areas of interest for 2013:
A few of our favorite sectors include insurance, industrials, and telecom and cable. In the current environment of low-grade deflation, businesses with reliable cash flows and above-market dividend yields offer potential opportunity. In addition, energy infrastructure (natural gas pipelines, gas export facilities, etc.) are an emerging area of focus. We are avoiding the retail sector, due to ongoing stagnation of household incomes and weak employment growth.
More broadly, we’re beginning to gradually shift our portfolios to a more “cyclical” bias (companies that are more sensitive to faster economic growth), as we expect the last half of 2013 to produce slightly faster economic growth. We also look for better profit growth in 2014.
Where to look next?
On the policy scene, here are a few things that investors should keep an eye on:
Sequester cuts. Scheduled to kick in on March 1, we expect that Republicans in Congress will attempt to enforce the entirety of the sequester, as they have given in on almost all other fiscal issues since President Obama was re-elected. We don’t expect this to be a market-moving event, outside of a few hiccups for defense and other Federal contractors.
Ongoing Fed action. The Fed will continue to add liquidity to the system in 2013, with little effect on the “real” economy, but a generally supportive effect on financial asset and commodity prices. We do not expect Republicans to put up much of a fight on the debt ceiling.
Housing outlook. Home prices, re-sales, and construction activity are key drivers of economic growth and investor sentiment. We believe home prices will level off in 2013 (Fed money-printing notwithstanding) because there is not enough income growth in the economy to sustain recent price increases. Recent strength in housing has been driven by cash buyers and institutional players, and we do not see this as sustainable.
Come back to our blog for further market thoughts and insights as the year unfolds.