So What Do I Do With My Money?™

2013 Investment Outlook

Policy around the globe, five investment scenarios, in-depth valuations and financial market trends… what does it all boil down to? Here are our preferred 2013 investments across the asset classes:

Fixed Income: Danger in Safety

• Prices of safe-haven government bonds could plunge when yields start to rise. Low yield = high price risk.
• We like global high yield and US munis for income— but do not expect much capital appreciation.
• We favor emerging market debt. In Europe, we prefer Italian and Spanish bonds over debt of weak European core countries.
• We are bullish on commercial mortgage-backed securities and collateralized loan obligations.

Equities: Global Smorgasbord

• We like global companies with strong balance sheets, steady cash flows and growing dividends.
• We favor high-quality US stocks, global energy and emerging markets.
• We are bullish on domestic consumption plays in Brazil and China, North Asian cyclical stocks, and Mexican banks and industrials.
• We like discounted exporters on Europe’s periphery and small “self-help” UK companies.

Good and Bad Income

• Income investing remains our strategy of choice in a zero-rate world.
• The hunt for yield has created pockets of overheating and narrowed valuations between top-quality and lessdesirable income assets.
• We detail the state of play in fixed income, high yield, emerging market debt, municipal bonds, dividends and real estate investment trusts on pages to 24–32.
  

Pain Trades

• Our biggest contrarian idea is buying Japanese exporters while selling the yen.
• Other pain trades include selling “safe” tobacco stocks, buying US companies with cash piles abroad, and buying securities of European and US financials.
• We have warmed up to Indian equities after the country’s reforms on foreign investment. See page 22 for our contrarian picks.
  

Commodities: Long View

• We like metals with long-term supply gaps and agricultural commodities. China’s appetite is huge.
  
  

Currencies: Dollar Bulls

• We are bullish on the US dollar due to the country’s energy boom and long-term growth prospects.

The Gift of Insurance

• Short-term implied volatility is eerily low whereas policy uncertainties are near financial crisis levels. Consider options to hedge downside and upside risks.
  

Volatility Reversal?

• The fire hose of monetary liquidity and investor hunger for yield has depressed short-term volatility, so maybe a reversal will have the opposite effect.