Back

Third Quarter Surge Caps 12-Month Relentless Risk Rally

October 10, 2012

The investor who had the foresight to buy into a globally diversified portfolio with moderate risk could have accumulated a king’s ransom over the following year. Equities were the sweet spot, but even fixed income — not that fake short-duration cash stuff, but real bonds — performed spectacularly.
-Douglas Coté, chief market strategist, ING

Remember this time last year? The U.S. debt rating recently had been downgraded, while the European Union appeared to be slowly imploding under the weight of its sovereign debt crisis. Investors responded to these events by herding into Treasuries and out of risky assets.

  • However, while falling equity markets may have been signaling Armageddon, fundamentals remained firm, suggesting an enormous buying opportunity was at hand. In fact, the investor who had the foresight to buy into a globally diversified portfolio with moderate risk could have accumulated a king’s ransom over the following year. Equities were the sweet spot, but even fixed income — not that fake short-duration cash stuff, but real bonds — performed spectacularly.
  • Even though the mispricing has narrowed as a result of the rally, equity markets continue to look cheap on a P/E basis. And with earnings forecast to reach an all-time high of $105 per share for full-year 2012, opportunity abounds.
  • The risks — including the global contraction trend in manufacturing and the potential end to Corporate America’s 12-quarter earnings growth streak, in addition to event risks like the U.S. elections and fiscal cliff, and a flare-up of the euro crisis — are not insignificant, however.
  • That said, there are many positive forces at work as well. The consumer is likely to be buoyed by marked improvements in the housing market. And, of course, the near-zero cash returns the Federal Reserve has all but guaranteed through 2015 remain the biggest risk to growing wealth for the fearful investors remaining on the sidelines.
  • While a backdrop of rising earnings is always preferable, we remain constructively bullish on risky assets.  As we said this time last year: “Successful investing demands a choice between prudent risk control and outright risk avoidance. Attempting to escape all the risks is capitulation, a course that leaves much of the future rewards for others.”

 

View pdf

¦
Advertisement