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Follow the Money, Again

January 28, 2013

In 2012, many equity strategists were surprised and confounded by the better-than-expected
US equity returns, given the lack of earnings and economic growth. Risk assets, such as
stocks, benefited from the decline in investor fear and a backdrop of quantitative easing.
-Richard Golod, director, global investment strategies, Invesco

 

Executive summary

Global equity market performance in 2012 was driven by accommodative monetary policy around the world, as well as a decline in investor fear after policymakers in Europe reduced the risk of a financial crisis. Global equity markets are likely to respond to the same stimulus this year but maybe not to the same degree. I believe the dominant factor that will drive equity prices in 2013 will likely surprise investors: inflation.

  • US. US stocks will remain attractive in 2013, in my opinion. Although corporate earnings will be difficult to predict this year, earnings multiples are likely to rise. The equity market has become increasingly sensitive to changes in inflation, but the inflation rate looks to stay low for a prolonged period. This suggests the Federal Open Market Committee (FOMC) will continue to support higher stock prices. I believe dividend-growing stocks continue to merit attention, even in a “risk-on” world — an investment environment that strongly favors higher-risk asset classes.
  • Europe. European leaders have made great strides in reducing the risk of a financial crisis and constructing a framework for banks and sovereigns to access capital. Unfortunately, the agreed-upon austerity measures will likely keep the region in recession for most, if not all, of 2013, and the slow pace of deleveraging among corporations and consumers could stifle growth in the future. Given the region’s declining earnings revisions and unattractive valuations, I believe investors should consider taking advantage of the eurozone’s attractive dividend-yielding companies.
  • Japan. A new government with new promises for additional fiscal and monetary policies has reignited investor confidence. The declining yen/dollar exchange rate could continue to benefit Japanese stocks.
  • Emerging markets. The recent decline in the yen/dollar exchange rate could benefit Asian currencies and drive stock prices higher as capital moves out of Japan into the emerging markets to preserve purchasing power. Seasonal effects, accommodative global monetary policy and reallocation of assets from global investors are some of the reasons I believe this asset class is attractive.

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