| NEW YORK
NEW YORK Dec 30 The investment landscape won't
be much different in 2013 than it has been this year, but the
investors might be.
After spending most of 2012 in a defensive crouch, cowed by
past crises and on guard against any future ones, more investors
seem willing to take risks in 2013 in hopes of a greater reward,
money managers say.
"Managing money with one eye on the rear-view mirror is no
fun," said Alan Wilde, head of fixed income and currency
strategy at Baring Asset Management, which oversees $50 billion.
With investors a bit less skittish but still starved for
yield, Wilde said he expects a "small increase in optimism" to
encourage investors to chase higher returns.
Doing so will require creativity as conditions around the
world -- advanced economies in particular -- are not conducive
to rapid growth. With debt levels and jobless rates high and
inflation subdued, most major central banks are committed to
holding interest rates near zero for years to come.
Cash may not be an option either. Savings accounts yield
virtually nothing and money markets only marginally more.
Returns on both are well below the rate of inflation, which when
stripped of volatile food and energy costs stood just shy of 2
percent in the year to November.
That panorama, investment managers say, should enhance the
appeal of assets such as stocks, high-yielding "junk" bonds,
floating-rate loans and mortgage-backed securities.
Of course, the uncertainty in Washington has had a
paralyzing effect. As of late December, talks between the White
House and Congress had yet to yield a plan to avert a looming
U.S. budget crisis.
Economists fear failure to prevent some $600 billion of
automatic spending cuts and tax increases from taking effect as
planned in January could thrust the economy back into recession.
While stock markets have wobbled in recent days, investors
still seem reasonably confident a deal will eventually get done.
That's quite different from the doomsday thinking that
dominated markets in 2012, when at times it seemed the euro
would collapse, the bottom would fall out of China's economy and
the United States would lurch back into a recession.
"Those kinds of distractions have hounded investors all
year, this idea that there was always a disaster just around the
corner," said Steven Englander, head of global G10 currency
strategy at Citigroup.
As a result, many anxious investors sought shelter in
low-yielding bond funds, which took in $297.3 billion this year,
according to Lipper data. Stock funds attracted just $13.56
billion in new cash despite double-digit gains for the S&P 500.
But those who did take risks in 2012 did remarkably well,
noted Jim McDonald, chief investment strategist at Northern
Trust, which oversees more than $700 billion.
The total return, including dividends, of the benchmark S&P
500 through Dec. 27 was 15.3 percent, while financial
stocks rose 29 percent after tumbling 24 percent in 2011.
European shares returned nearly 13 percent, while
the Barclays Global High Yield Bond Index was up 19.6 percent
Even Greek government bonds rallied once it became clear the
country would not be leaving the euro zone, with the 10-year
yield falling from around 40 percent in March to 12 percent at
year end. Returns were much more modest on benchmark German
bund; yields fell from 2 percent to 1.3 percent in that time
Northern Trust said it would enter 2013 with "a tactical
overweight to risk," though McDonald warned that the slight
increase in investor optimism will make returns more modest.
REACHING FOR YIELD
Next year looks like it could be another solid one for
equities. Even with 2012's gains, Northern Trust says earnings
yields still look attractive, and continued central bank
stimulus should provide fuel for further gains.
David Darst, chief investment strategist at Morgan Stanley
Smith Barney, favors what he calls the "global gorillas" --
large companies with a global footprint that have exposure to
emerging markets, which should grow more swiftly than developed
Dividend-paying stocks from Taiwan, Mexico, Brazil and
elsewhere also present a good opportunity to pick up yield, said
Michael Fredericks, lead manager of the BlackRock Multi-Asset
Income Fund, especially if U.S. dividend taxes rise next year as
a result of a deficit reduction deal.
Fredericks said the most promising stocks tend to be those
of companies that rely on domestic demand rather than the big
exporters that dominate many emerging market mutual funds.
"If you really want to get at the local, organic growth
taking place in emerging markets, you have to get more direct
exposure to that growth than you would by buying a big exporter
whose business depends on U.S. and European consumers," he said.
Of course, investing next year will not be risk-free.
Europe's debt crisis could worsen again, the U.S. economy could
tumble over the fiscal cliff and into recession, continued
turmoil in the Middle East could trigger a spike in oil prices
and a global slump.
"It's still a market where you have to be nimble," Darst
said. "You still have to drive with both hands on the wheel."
That's especially true in fixed income, where strategists
warn against pouring too much money into bond funds with
interest rates at record lows.
Even a modest rise in bond yields could do immense damage to
bond portfolios, said Rick Rieder, BlackRock's chief investment
officer for fundamental fixed income. BlackRock expects 10-year
U.S. Treasury yields to rise to 2.25 percent next year from
around 1.70 percent currently.
That, he said, means bond investors will have to "take a
little bit of credit quality risk" in 2013 and to consider
taking on some higher-yielding but less liquid securities.
"We still like high yield, U.S. municipal bonds, bridge
loans and structured collateralized loan obligations (CLOs),
which give you income without a lot of duration," he said.
Average yields on high-yield corporate bonds, also known as
"junk" bonds, were hovering above 6 percent, well above the 1.7
percent available from 10-year Treasuries.
Mortgage-related securities were also likely to be in high
demand thanks to the Federal Reserve, which has committed to
buying $40 billion of mortgage bonds each month to lower
long-term interest rates, boost housing and help the broader
DoubleLine Capital, which oversees more than $50 billion in
assets and has favored residential non-agency mortgage-backed
bonds this year, was now looking at commercial mortgage-backed
securities to help raise returns in 2013, senior portfolio
manager Bonnie Baha said at the Reuters Global Investment
Outlook Summit in November.
Rieder agreed: "We like owning assets with structural
tailwinds to them, such as real estate-related assets.
Commercial mortgage-backed securities are one of our favorites."