2013 Outlook: Love Risk by Managing It

Uploaded by wellsfargo on 08.01.2013

bjbjBrBr John: Just remember how much things can change. Hurdles that seemed insurmountable
can be behind you at some point in time. Jim: I ve been saying for about three years now
it s still too early in this cycle to be overly cautious. Brian: I think it s important to
recognize that in this economy even though we have low growth, it s still growth. Peter:
I m Peter Nulty. Thanks for joining us for our 2013 Outlook. We ve got three Hot Topics
to cover: What s ahead for the Fed, what are ways to approach international investing,
and what opportunities await in equity and bond markets. Peter: Gentlemen, thanks for
being here. Brian:Thank you for having us. Jim: Thanks for having us John: Thanks. Well,
I though we d start by asking what managing risk means to each of you, and how it might
help us to learn to love risk to some degree. John, could we start with you? John: Well,
you can t get rid of risk. Risk is there. Risk is the future and we re going to live
in the future. The best you can do is spread it around, and I think that s what we have
to do. We have to take different positions with different assets that help us no matter
what s going on. Peter: Thanks John. Jim, what do you feel? Jim: Well, it s a time that
recommending an overweight in the credit markets, the credit sectors of the fixed-income markets
that would be corporates and munis, I m interested in credit research. We want to mitigate credit
risk to the degree that we can, and good credit research is extremely important in that regard.
Peter: Thanks for your thoughts, Jim. Brian, how do you view this? Brian: I think managing
risk really boils down to diversifying a portfolio, but also looking for opportunities globally.
As Jim had pointed out the need to know what you own through the credit research or on
the equity side. It s probably going to come from actually doing some of the research on
the corporations themselves that you re investing in. So you might not learn how to love risk,
but at least maybe you could learn how to stomach it. Peter: And that brings us to our
first Hot Topic: What s ahead for the Fed? Brian, what do you see the Fed doing in the
year ahead? Brian: As it stands right now, the Federal Reserve based on their forecast
they re not expecting to actually tighten monetary policy until the middle of 2015.
They have set some specific targets that they would like to see in their forecasts before
they begin to increase interest rates. So they re looking for unemployment to come down
to 6.5%, and they will tolerate inflation of going up to 2.5%. So they think that s
going to happen maybe in the middle of 2015. According to my forecast, I think they might
be a little bit too pessimistic about their ability to control inflation, and perhaps
also their ability to drive down the unemployment rate. So we might be looking at more of 2014
as far as when the Fed might tighten monetary policy. But for the year ahead, I think it
s really important to note that the composition of the Fed, the voting members of the Federal
Open Market Committee is changing. It s going to take on what I would call a much more dovish
tone, meaning that those individuals who are going to be actually voting on policy are
going to be willing to tolerate more inflation than some of what would be called the hawkish
members or those who are more concerned about controlling inflation. So for the balance
of 2013, I m not really expecting the Fed to tighten monetary policy. They might actually
loosen monetary policy even more through buying more Treasury Securities or Mortgage-Backed
Securities. John: I d add one thing because I think the Feds have decided that if they
re going to make a mistake in the next few years and they are going to make it by being
too loose for too long. They would much rather keep rates too low for too long than the other
way around. Peter: John, to follow up on that, what impact might the Fed actions have on
the equity markets? John: Well, if go back over a long period of time, the Fed s decision
whether to be accommodative or restrictive is one of the driving forces of the market.
When the Feds accommodate, the market tends to go up, all other things being equal and
that s not always true. Sometimes you have very high valuation. Sometimes you have terrible
earnings numbers, and that can offset it. But I think in the environment where we are
right now, the Fed being the way they are, trying to push money towards the economy ultimately
is pushing money towards the markets, and I think that s a positive for stocks. Peter:
Thank you, John. Jim, what do you think interest rates might do, and if they remain low what
would that mean for investors? Jim: Well, I think as Brian mentioned it s very likely
that short-term rates stay where they are near zero for the Year 2013. And if that s
the case, bond yields could rise somewhat even if short-term rates stay this low. But
they can t begin a prolonged cyclical uptrend when the Fed Funds Rate is close to zero.
So what I think that means for bond investors is that cash and cash equivalents will continue
to provide very, very meager returns. Investors need to look at the other segments of the
market. They can t be overly conservative here. They have to take some risk, as we said
earlier, particularly credit risk in my view in order to generate any degree of income
in their fixed-income portfolios in 2013. Peter: Brian, despite the Fed s policies of
keeping interest rates very low, borrowing has been very sluggish. Do you think that
will continue? Brian: I think we ve actually seen a gradual pickup in demand for borrowing
from the commercial side and the industrial side. We ve also seen that on the automotive
side as far as with an increase in lending for purchasing vehicles. What s really I think
holding back the big increase in demand for credit in this economy is on the mortgage
side. That is beginning to come back, but if we get a little bit more regulatory clarity,
the government itself needs to define what a qualified mortgage is before banks are going
to be really going out there lending a lot of money for mortgages. Once that gets clarified,
I think we could see a pickup in private sector demand for borrowed money, but we might not
see that until probably the second half of the year. Jim: Just to follow up what Brian
just said, in the report we have a graph of just how weak private sector borrowing has
been since the recession, and that s a major factor in view anyway, that has helped keep
interest rates this low this long into an economic recovery, expansion. Peter: Moving
right along, let s talk about how we might approach international investing. Brian, from
an economic perspective, what developments are you watching particularly? Brian: Well,
there are a lot of things going on globally, and I think that investors should stay aware
of some of these events. Obviously, what s going on in the United States is important
as far as what the trajectory of growth is going to look like. I think that we could
have slow growth in the first half, maybe accelerating towards the end. But some of
the big things really globally might be more on the political side. If we look over in
Europe, we have an election in Italy that s going to be coming in February. We re also
going to be having an election either in September or October in Germany. And those two elections
could perhaps determine whether or not the Euro Zone crisis is going to continue to get
better as they have been making incremental improvements, or if they re going to be back
stepping. Then, we also obviously have issues in the Middle East. There is going to be an
election this summer in Iran, and that could be very interesting for investors to watch.
Peter: John, considering Brian s recent comments, how does this impact possibly European and
other foreign equity markets? John: Brian and I talked about this towards the end of
last summer. We looked back and we said, My gosh, there s been an enormous disparity between
U.S. returns and the returns from foreign markets. Just too much. And I think what we
ve gradually been doing over that period of time since then is moving money towards those
areas. I think they re attractive. The U.S. is attractive also, but I think incrementally
we re seeing more and more positive things in Europe, more and more positive things in
China, more and more positive things in Japan. It deserves more of the interest than we ve
shown it so far. Peter: Jim, what s the state of investing in foreign bonds, and how might
these be positioned in an investor s portfolio? Jim: Well, the global bond markets have out-performed
domestic bond markets by moderate amounts over these last couple of years. For example,
last year in the investment grade arena global bonds, international bonds out-performed domestic
by about two percentage points in terms of total return. The same differential in high
yield versus emerging markets. So there are areas around the world that offer better yields
than the United States. Emerging markets are a good alternative or a complement I should
say to domestic high yield. Some diversification from the international markets. Some additional
income. I think you need professional management when moving into those markets, but there
are incremental better returns to be had. Peter: Our third and final Hot Topic is investment
opportunities in the equity and fixed-income markets. Brian, what s your outlook for growth
in 2013? Brian: I think growth is going to remain sluggish. We got a little bit more
clarity as far as what the tax code is going to be looking like for the balance of the
year, and actually a big part of the Fiscal Cliff Deal was to actually make a lot of that
permanent as permanent as something can be coming out of Washington, D.C. And so, I think
that could be somewhat conducive to growth going forward in the U.S. But what we might
see is more of a hockey stick as far as the pace of growth where it s fairly slow in first
half, and then accelerating towards the second half. One of the big features of the tax deal
that was struck that I liked was the bonus depreciation given to businesses. It s going
to, I think, encourage them to make more investments in property, plant and equipment, which could
be very beneficial to longer-term growth in the U.S. Peter: John, let s talk about one
of the most popular stock market indicators, the Standard & Poor s 500. John, describe
to us what we re seeing in this chart. What is the significance of it? John: This chart
is a history of prospective consensus earnings expectations for the S&P 500. As you see,
it has a tendency to rise as time goes by. Now, the rate of rise has slowed recently,
but it hasn t turned negative. I think that s what s important. I think there is a consensus
on Wall Street, a dark consensus, that that number is eventually going to go down, that
we re going to see it roll over, that corporations can t remain as profitable as they are right
now. I think that s just plain wrong, and I think as it gets to be disproved, I think
the market itself in terms of price can benefit. Jim: Jim, you also brought a chart along that
looks very familiar. What does this one represent? Jim: It is familiar. We have included this
chart in the past two Outlook Reports, and the reason for it is several fold. One, to
illustrate just how expensive quote, unquote in terms of opportunity costs it has been
for investors to be investing in cash equivalents. We have Treasury Bills as our representation
of cash equivalents, and for the past three years the cumulative return has been only
about 0.34%. That s it from Treasury Bills. Compare that with returns in the municipal
market over the time period the past three years in the neighborhood of 22%. In the high-yield
corporate bond market in the neighborhood of almost 40% total returns cumulative over
the past three years. So the value in investing in fixed-income has been away from cash and
cash equivalents. I think that that is still the underlying strategy to pursue in 2013.
Look to those markets that have been performing quite well these last three years, the municipal
market, the corporate market, investment grade, and high-yield corporates. They I think in
2013 will perform substantially better than cash and cash equivalents. Peter: John, in
months ahead, what s your view of growth versus value stocks and large caps versus small caps?
John: I still like growth more than value. I still like large cap more than small cap.
I think the environment will end with slow growth, but still growth favors those kinds
of things. Also, you look at the potential buyers. As more and more Baby Boomers set
to offset the income they re losing as they retire going forward, I think the need for
yield will become paramount. And I think large caps can provide that in growth stocks and
give them some visibility down the road. Peter: Jim, what does the current environment suggest
for durations? Are you thinking in terms of long-term or short-term durations? Jim: Well,
at the risk of repeating myself, to some degree we probably have too many investors in the
fixed-income arena seeking very short durations. In other words, cash and cash equivalents.
It would be much better in our view that we look at sectors of the market that are intermediate
in duration. We need not go into very long duration strategies at this point in the investment
cycle, but we need to capture income. Typically, with yield curves relatively steep, income
peaks out at around the 10-year, 12-year area of these yield curves. That s the focus in
terms of duration. We can increase income by using credit risk than a great degree of
duration risk over the 12 months ahead. Peter: Jim, let s wrap all this up into your thoughts
on asset allocation. How would you distribute a portfolio, a fixed-income portfolio? Jim:
If it were for a municipal portfolio for an investor in a high tax bracket, in the municipal
market, I would want to focus on Single-A, Triple-B credits, underweight Triple-A and
Double-A because quality spreads are still very wide. You get good increase in yields
by going into Single-A, Triple-B credits, and maybe even a small allocation to the Double-B
sector. That would be for a municipal bond portfolio. On the taxable side, again focusing
on corporates primarily, Triple-Bs in the investment grade arena and high yields perhaps
underweighting the weakest of high yields at this stage of the cycle, that is Triple-Cs
and weaker because that is where we find income. Peter: John, what allocations do you see for
an equities portion of a portfolio? John: Well, there are three areas I d overweight.
First of all, healthcare. I think we have more spending on healthcare coming regardless
of what else happens. I think the valuations are not as high as they can be, and I think
they still are a great deal of flexibility for cash flow. I like technology. I don t
think the technology cycle is finished for most corporations. I think we re in a situation
where valuations have come down as the stocks have come down. You don t get a chance to
buy these stocks near market multiples very many times, you re getting one now. And finally
I like energy. I think that a lot of things will change in energy. I think the U.S. there
will be great developments with natural gas. I think we re going to see a situation where
you re going to have to spend money to develop infrastructure. Outside the U.S., I think
the high cost of finding and developing fields is going to keep the price of oil high for
a longer period of time than many people expect right now. Peter: Brian, for investors, how
would you allocate assets between the fixed-income and the equities portion of a portfolio? Brian:
In general, we ve been recommending over the last few years to be overweight equities as
part of your overall portfolio relative to fixed-income. Now, for this upcoming year,
I think that it does depend upon your investment horizon. If you are looking at a longer-term
investment horizon, you can probably afford to take on a little bit more equity risk just
because I think longer term that s where more the total return for a portfolio might come
from. Shorter term you could be looking at having a little bit more agile portfolio as
far as some of these bigger political events approach maybe look at adding some of the
fixed-income exposures. But in general, the allocation for short-term investors versus
long term, I think could be pretty similar for the upcoming year. Peter: Well, gentlemen,
that brings us to the end of our program nearly, but we would welcome parting thoughts. John,
is there anything else that you could leave us with? John: Just remember how much things
can change. Hurdles that seemed insurmountable can be behind you at some point in time. Problems
that couldn t be solved are dealt with, maybe with difficulty, but they re dealt with. Things
can get better. Things can improve from where we are right now, and I think that s something
investors have to remember. Peter: Thanks a lot, John. Jim, a parting thought? Jim:
Well, I ve been saying for about three years now it s still too early in this cycle to
be overly cautious in the fixed-income arena that is to have an over-allocation of cash
and cash equivalents. And I think the fundamentals that drive interest rates like Federal Reserve
policy, moderate economic growth, low inflation still suggests that for the Year 2013, we
should not be recommending an overweight in cash and cash equivalents. We are recommending
investing for income, not safety, in 2013. Peter: Jim, thanks. Brian, any last thoughts?
Brian: I think it s important to recognize that in this economy even though we have low
growth, it s still growth. Whether you re looking domestically or globally, there is
still positive economic growth, and I think that the momentum is beginning to shift towards
faster growth. And investors who are willing to invest for growth I think could be rewarded.
Peter: Well, that is it for today. John, Jim, Brian, thanks for joining us. All: Thank you.
Peter: And thank you for joining us. We hope you found the discussion helpful. If you d
like to continue to be informed on matters of the economy and the markets, commentaries
from our three strategists and many others are available on our website. You can also
subscribe to our weekly investment news podcast On the Trading Desk, and several times a day
new economic news and market analysis is available on our blog, Advantage Voice. I m Peter Nulty.
Take care and have a great new year. 2013 Outlook Love Risk by Managing It YouTube.2mv
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START OF TAPE JP Larrea Dialogue 1.dot aazinger Microsoft Office Word ./'7 Transcription Studio
[05:39:23] START OF TAPE Title Microsoft Office Word 97-2003 Document MSWordDoc Word.Document.8
[Content_Types].xml Iw}, $yi} _rels/.rels theme/theme/themeManager.xml sQ}# theme/theme/theme1.xml
w toc'v )I`n 3Vq%'#q :\TZaG L+M2 e\O* $*c? )6-r IqbJ#x ,AGm T[XF64 E)`# R>QD =(K& =al-
4vfa 0%M0 theme/theme/_rels/themeManager.xml.rels 6?$Q K(M&$R(.1 [Content_Types].xmlPK _rels/.relsPK
theme/theme/themeManager.xmlPK theme/theme/theme1.xmlPK theme/theme/_rels/themeManager.xml.relsPK
bg1="lt1" tx1="dk1" bg2="lt2" tx2="dk2" accent1="accent1" accent2="accent2" accent3="accent3" accent4="accent4"
accent5="accent5" accent6="accent6" hlink="hlink" folHlink="folHlink"/> urn:schemas-microsoft-com:office:smarttags
Street urn:schemas-microsoft-com:office:smarttags PlaceName urn:schemas-microsoft-com:office:smarttags
PlaceType urn:schemas-microsoft-com:office:smarttags address urn:schemas-microsoft-com:office:smarttags
City urn:schemas-microsoft-com:office:smarttags place urn:schemas-microsoft-com:office:smarttags
country-region urn:schemas-microsoft-com:office:smarttags State