Next year will mark the beginning of the “great rotation” to equities from bonds, according to Bank of America Merrill Lynch economists and strategists.
Michael Hartnett, chief investment strategist, said in a Tuesday conference call that the next 12 to 18 months will provide low yields as the Federal Reserve's policies will stop deflation. When that results in labor market gains, equities could reach new highs, Mr. Hartnett added.
BofA Merrill Lynch is bullish for 2013 on U.S. equity markets. Savita Subramanian, head of U.S. equity and quantitative strategy, forecast the S&P 500 ending 2013 at 1,600, eclipsing 2007 highs. Ms. Subramanian said growth will improve in the second half of the year following a resolution to the fiscal cliff crisis, which will drive capital spending.
The investment focus should be on GDP-sensitive stock sectors, global growth stocks and dividend growth stocks, Ms. Subramanian said.
While BofA Merrill Lynch economists and strategists repeated that the effects of the U.S. fiscal cliff and ongoing European debt crisis are the largest concerns in 2013, they expect Europe to bottom out in the second half of the year and then stabilize. The two biggest concerns now are the upcoming Italian elections and Spanish bond auctions.
There is significant concern that the U.S. won't immediately solve its fiscal policy problems, but the panelists on the conference call expect a resolution by spring at the latest with about $300 billion in austerity measures.
BofA Merrill Lynch projects the U.S. economy will grow by 1.5% in 2013, down from 2.1% this year, and up to 2.8% in 2014. Europe is expected to remain at -0.4% growth in 2013 and rise to 0.8% in 2014. The global economy is projected to grow 3.2% in 2013, up from 3.1% this year, and increase to 3.9% in 2014, which was described as a normal global growth rate.
Emerging markets are expected to see gross domestic product growth of 5.2% in 2013, up from 4.9% this year. Alberto Ades, co-head of global economics research and head of global emerging markets fixed-income strategy, said growth in the medium term will be slow for China with a “new normal” of about 7% in the second half of the decade. Mr. Ades selected Brazil as the Latin American country to see the most growth.
Credit returns are expected to be low next year with investment-grade bonds returning 1.5% to 3.5%, while high yield will return 6% to 7% and emerging markets a little higher than high yield, said Hans Mikkelsen, high-grade credit strategist.