Muscat: The year ahead could be 'lucky 13' for cautious, savvy investors, said analysts from the research firm BofA Merrill Lynch yesterday. The beginning stages of a great rotation in the markets create opportunities for cyclical and undervalued asset classes poised for recovery.
BofA Merrill Lynch Global Research released its 2013 Year Ahead market outlook, saying that a cloud of uncertainty is likely to overhang the markets through a painful and protracted resolution of the US fiscal cliff. However, global economic growth is expected to pick up steam in the second half of the year, ultimately surprising on the upside and pushing the S&P 500 Index to 1600, a new all-time high.
"This time last year, the risks to global growth were to the downside as the European debt crisis, China hard landing fears and the US fiscal cliff clouded the economic outlook," said Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research. "For 2013, we expect the resolution of fiscal policy issues, another year of accommodative central bank actions and improving corporate profits to skew the macro and market risks to the upside."
BofA Merrill Lynch analysts outlined 10 macro calls on which they are basing their 2013 outlook.
The global economy grows 3.2 per cent, gradually improving through the year, led by China and the US. Resolution of the fiscal cliff in the US and successful negotiation of aid to Spain, combined with high liquidity and low commodity prices, should support a gradual improvement in global business and consumer spending through the year. By the end of 2013, growth is expected to rise to 2.5 per cent in the US and 8 per cent in China.
Fiscal austerity in the US and Europe offsets monetary stimulus from central banks. Monetary easing may not be enough to offset fiscal contraction in the first part of the year. Fiscal austerity in Europe and in the US – the latter by as much as 2 per cent of GDP – is likely to be a drag on growth.
The US home prices are expected to rise another 3 per cent in 2013, adding to the 5 per cent gain in 2012. Housing starts could increase by more than 25 per cent and a 3.5 per cent average annual appreciation over the next 10 years should stimulate jobs to construction and related sectors such as furniture, building materials and financials.
With support to Spain from the European Central Bank, the European economy should stabilise as the year progresses. Despite a series of episodic flare-ups of the ongoing crisis in Europe, the big tail risk of a eurozone breakup has likely passed.
Against a backdrop of subdued growth in developed markets, GDP growth in emerging markets is expected to recover to 5.2 per cent, led by the BRIC economies, particularly China. However, rising inflation could leave emerging market policymakers with little room to ease.
Global equities should be the best performing asset class. Powerful policy support, reasonable valuations and receding tail risks should help make global equities the best performing asset class in 2013. The US, European and Asian equity markets could see gains of 10 per cent to 16 per cent next year, with the MSCI AWI reaching 370 and the S&P 500 Index reaching a new all-time high of 1600 by year-end.