COLUMN-Playing the wild cards in 2013

Mon Dec 31, 2012 1:05pm EST

By John Wasik

CHICAGO Dec 31 (Reuters) - At this point, most investors are peering over the fiscal cliff and feeling like Jimmy Stewart in the classic Hitchcock film "Vertigo." But if you look beyond the precipice, there is some solid ground.

For one thing, the U.S. housing market will be better than most people expect, which bodes well for patient investors holding onto consumer-sector stocks. Most economists are not predicting any startling jump in home sales or prices next year, and they largely have not forecast how a housing rebound will spill over into the wealth effect of increasing consumer spending and job creation.

Home foreclosures in November hit their lowest rate in six years, a trend that is likely to continue, according to RealtyTrac, an online marketplace of foreclosure properties.

If the Obama administration can come up with a plan to stem foreclosures or accelerate turnover of unoccupied properties, that would reduce overall home inventories and boost sales and prices.

Such a plan would also spur sales of appliances, vehicles and other consumer durable and discretionary goods and services. To make the most of this opportunity, consider the iShares Dow Jones Consumer Services ETF or the Industrial Select Sector SPDR.

This is just one example of how an investor could play the wild cards in the economic forecast for 2013. There are still plenty of buying opportunities, even in the face of uncertainty.

Generally, most middle-of-the-road forecasts are calling for sluggish U.S. growth this coming year. A widely followed survey by the National Association of Business Economists shows expectations for about 2 percent growth in U.S. gross domestic product, which is roughly what they predicted for 2012.

Accompanying that growth is a slow resolution of the residential housing downturn, increased consumer consumption and an improving job market, which will result in an average 7.7 percent jobless rate, the survey shows. While other economists are giving similarly uninspiring forecasts, there are some more compelling things that could develop.

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You have to get away from a lackluster U.S.-centric perspective to understand that international stocks are still going to reflect rising GDP in developing countries. According to RBC Wealth Management's 2013 outlook, a real global growth rate of 3.5 percent equates with stock returns of 5 percent to 10 percent.

While the U.S. Standard & Poor's 500 price-to-earnings ratio is near its long-term average, similar measures in some European and Asian markets are well below average, according to RBC. Growth will continue in China (8 percent), India (6 percent), Brazil (3.5 percent) and Indonesia (3 percent).

If international investors are largely finished with retreating to bonds as safe havens during the prolonged euro zone crisis, that would trigger a buying spree in stocks. In that case, you would want to have exchange-traded funds such as the Vanguard Total Stock Market ETF or the iShares Core MSCI Total International Stock ETF.

There are still opportunities in bonds, though.

The general warning has been out there for years: Shorten your bond-fund maturities because interest rates will eventually rise and bonds will be sold off. That still holds, but you can find higher yields through bank loans, emerging markets and municipal bonds, Mike Gitlin, director of fixed income for T. Rowe Price, said in a recent 2013 outlook.

Funds like the Fidelity Floating Rate High Income Fund invest in floating-rate bank loans. The iShares JP Morgan US Dollar Emerging Markets bond ETF holds an index representing bonds from developing countries. And the SPDR Nuveen Barclays Capital Muni Bond ETF invests in an index of U.S. municipal bonds generally rated "AA" or better.

What would derail my wild cards? The usual worries about European fiscal resolution, budget and debt-ceiling battles in Washington, and growth in China. There also will be blips along the way as market volatility continues unabated.

A key component of my wild-card strategy is investing in sectors or regions when they are cheap and undesirable. If you feel especially brave, you can buy big-company European Union stocks through a fund like the Vanguard MSCI Europe ETF .

Certainly long-term investors who are not retiring soon should consider holding at least 40 percent of the stock portion of their portfolios in non-U.S. shares.