There are still a few weeks left in 2012, but the focus has already shifted to 2013. The next year will be a “make or break” one for some of the investment themes we’ve been tracking, but in others, it will be more of the status quo.
I’ll start with Europe. I spent much of 2012 attempting to buy the dips in the markets most affected by the ongoing sovereign debt crisis. In my Covestor Tactical ETF portfolio , my primary trading vehicle was the iShares MSCI Spain ETF (EWP) and my record on this trade was very much a mixed bag. I underestimated how truly terrified investors were of a euro-zone breakup, and I entered the trade far too early. The losses I took earlier in the year on EWP are a big reason for the Tactical ETF portfolio’s underperformance vs. the S&P 500.
In the Covestor Sizemore Investment Letter, I took positions in Spanish banking giants Banco Santander (SAN) Banco Bilbao Vizcaya Argentario (BBVA), and hopefully, my timing on these trades was better.
I continue to be a bull on European stocks in general, and Spanish stocks in particular. At current prices, I consider European blue chips to be very attractive, and I like several as ways to get “back door” exposure to emerging markets.
One way for European blue chips to be a profitable investment over the next one to five years would be that the euro zone simply avoids blowing up.
Unfortunately, that may be asking a lot. Political forces are quickly pushing the UK to the exit door, and the return of Silvio Berlusconi puts Italy’s reform agenda at serious risk. And Spain may be facing a bona fide secession crisis from Catalonia, which would likely mean a meltdown in the Spanish sovereign debt market.
So, while I remain bullish on Europe, I acknowledge that 2013 will be a “make or break” year. If Europe survives 2013 intact, then I believe chances are good it will muddle through. But this is by no means certain.
Dividend-paying stocks were a major investment theme for Sizemore Capital in 2012. In addition to comprising a large allocation of both the Tactical ETF portfolio and the Sizemore Investment Letter portfolio, we created a new model to focus specifically on dividends and dividend growth: the Covestor Dividend Growth portfolio. This model is currently concentrated in dividend-paying stocks, master-limited partnerships and conservative real-estate investment trusts.
Investors have been concerned that higher taxes on dividend income will be coming down the pipeline if President Obama gets his way on tax hikes for high-income Americans. This is a legitimate worry, but I don’t see higher taxes having much of an effect on the long-term shift in investor preferences for income.
There are multiple, overlapping trends at work. First, with rates on bonds and traditional savings instruments crawling along near record lows, investors have little incentive to dump dividend-paying stocks. Yes, they will likely be paying more in taxes on the dividend income. But what is their alternative for income? Bond interest will likely be taxed at an even higher rate, in my opinion.
Demographics also play a role here. As the boomers approach retirement, they are developing a strong preference for income-producing securities. And as the largest and wealthiest generation in history, the boomers tend to get their way. Dividend tax hike or no dividend tax hike, the demographic-driven demand for income is not likely to change, in my opinion.
Furthermore, current income is only one reason to buy dividend-paying stocks. Companies that pay a reliable dividend are, in my opinion, rightly viewed as being more stable and conservatively managed. I also believe they are also less likely to be engaged in accounting shenanigans. All of this matters more today than in years past to investors who have gotten burned by scandal after scandal over the past decade.
With all of this in mind, Sizemore Capital intends to continue its focus on income-producing securities such as dividend-paying stocks.
Finally, I expect a good year for emerging markets. On this count, I was flat-out wrong in 2012 (as a value investor, I prefer to say “early”). I underestimated how badly the markets would react to slowing in China and Brazil. But after spending much of the past year in a correction, I expect to see emerging markets have a breakout year in 2013.
Disclosure: Mr. Sizemore is long EWP, SAN and BBVA.
Certain information contained in this presentation is based upon forward-looking statements, information and opinions, including descriptions of anticipated market changes and expectations of future activity. The manager believes that such statements, information and opinions are based upon reasonable estimates and assumptions. However, forward-looking statements, information and opinions are inherently uncertain and actual events or results may differ materially from those reflected in the forward-looking statements. Therefore, undue reliance should not be placed on such forward-looking statements, information and opinions.
