There has been a slump in stock prices since the election, as worries over the fiscal cliff have increased. We have chosen to be inactive in November as increased volatility due to uncertainty over the US budget talks caused a widespread sell-off in the markets.
We believe that 2013 will be a year where the US will grow at a modest rate (below 2%) but faster than the Euro zone countries. Following a weaker 2012 Q4, we believe that the US economy will get a boost from building activity in the aftermath of the Sandy hurricane.
Given the high inventory component of the growth in the third quarter, we see a more sluggish investment in the first quarter of 2013. It is crucial that the fiscal cliff avoided and the debt ceiling raised so that a credit rating downgrade be avoided.
We assume that there will be an agreement reached with regard to expenditure cuts and tax increases and the fiscal cliff will be avoided. Therefore, we see the probability of a US recession rather low. We continue to believe that the US recovery is on its way as indicated by the revival of the housing market. We do however believe that recovery in employment will be sluggish.
In 2012, we were a bit disappointed with the performance of energy stocks as we expected these stocks to outperform the market in the initial stages of economic recovery based on our sector-rotation strategy.
The downward trend in energy prices is a reflection of expectations regarding future weak demand if the fiscal cliff cannot be avoided. We do believe that 2013 will be a year where demand for oil especially from rebounding emerging markets such as China which will benefit the energy sector. We expect non-OECD demand to overtake that of the OECD in 2013. Therefore, we hold on to our energy stocks as we approach the New Year.
As the U.S. is on the path to energy self-sufficiency in less than two decades, we tend to be bullish about the prospects of some domestic oil refiners such as Tesoro Corp. (TSO) which also, in our opinion, has low debt, attractive valuation levels and high earning growth.
Year to date in 2012, our silver and gold stocks have benefited from turbulent times. In the first quarter of 2013, as uncertainty continues, there may be more upside in precious metals in my opinion.
In 2012, we purchased real estate stocks, and the housing sector still continues to recover. We think that the rally in housing-related stocks is not over yet as we expect further out-performance in 2013.
The Fed’s commitment to keeping interest rates low throughout 2013, coupled with rising consumer confidence should continue to make real-estate stocks a major investment theme in 2013, in our opinion.
We continue to expect that the internet-based travel industry stocks will benefit from the ongoing economic recovery and rising consumer confidence in 2013. Priceline (PCLN) and Expedia (EXPE) are two stocks that illustrate this trend.
As far as our technology stocks are concerned, we expect that the downward trend in November will reverse in 2013. We believe that strong balance sheets, good valuation ratios, and low earnings volatility makes this sector attractive from investment point of view.
Furthermore, technology stocks are generally low or no dividend payers and with an increase in dividend tax, they may become attractive to dividend-investors.
We are hopeful for stocks such as Apple (AAPL) also in 2013. We believe despite the fierce competition in smart phones and tablets, estimated growth potential for these products in Emerging markets such as China, and Latin America amounts to three digit rates.
We believe the recent underperformance by AAPL is more due to supply issues than low demand, which is to be solved in due course.
One area which may surprise investors next year is the luxury goods sector. We believe 2013 will be a year where the rebound in Chinese consumer spending will revive demand especially for affordable luxury brands such as Ralph Lauren (RL) and Coach (COH).
For 2013, any contagion from the European debt crisis aside, we see the biggest risk for the US stocks is deterioration in credit quality of bank loans driven by increased unemployment as a result of austerity measures. This might affect the banking sector in a negative way. Despite enjoying the upside with the financial stocks in 2012, we continue to be cautious about overweighting banks in our portfolio.
We are also cautious about the performance of health care stocks in 2013 given the proposed 2% budget cut in health care. Although the biotechnology industry may surprise investors with positive performance, operating profits are expected to be squeezed in government sponsored industries such as health-care providers.
Irrespective of any valuation issues, defense stocks will also be negatively impacted by spending cuts. Another dimension of the fiscal cliff is the rising of dividend tax which is a consideration for bearish investors who in 2012 preferred high dividend paying stocks.
In our stock-ranking model, dividend rate is not a very significant factor for ranking a stock high as dividend stocks often underperform when economic recovery is in full swing. Therefore, whatever the outcome of the dividend tax legislation might be, we believe it is unlikely to have a significant impact on our portfolio as the dividend rate has not been an important choice-criterion for us.
The investments discussed are held in client accounts as of November 30. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable.
Any index comparisons provided in the blogs are for informational purposes only and should not be used as the basis for making an investment decision. There are significant differences between client accounts and the indices referenced including, but not limited to, risk profile, liquidity, volatility and asset composition. The S&P 500 is an index of 500 stocks chosen for market size, liquidity and industry, among other factors. The NASDAQ-100 is a stock market index of 100 of the largest non-financial companies listed on the NASDAQ. The Merrill Lynch 100 Technology Index (MLO) is an equal-dollar weighted index of 100 stocks designed to measure the performance of a cross section of large, actively traded technology stocks and ADRs.
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.
