For many investors, a decidedly shortsighted mentality continues to limit horizons and opportunities and is consigning them to an "island of fear." While we recognize current concerns and uncertainties, we also see the positive near-term trends and solid longer-term investment outlook, and would position portfolios to take advantage of them.
There are certainly many reasons for current investor fear —the ongoing sovereign saga in Europe, the fiscal cliff worries in the U.S., worldwide political leadership changes, slower growth in emerging markets, geopolitical volatility, pension concerns, and an overindebted public sector, to name just a few.
We don't need another research report, news headline, or think-tank study to reinforce what we have all experienced in the past five years and must be ready for in the future. The bottom line is that the public sector has a great deal of restructuring to do, the economic and employment growth curves are going to be slower than "normal," central banks will have to remain easy, access to capital will be more restrictive than we have been used to, and the direction of global policy should remain erratic. Tough decisions will have to be made, and leadership will be needed to work through it all. We know this, and therefore the investment landscape remains fragile.
But these pervasive uncertainties and investor fears are overshadowing profits and solid long-term private-sector trends. In the U.S., with housing starting to recover, gasoline prices down, and mortgage rates at record lows, the stage is set for a possible better growth picture. At the same time, Europe is making slow but more substantive moves toward addressing its problems, and China has reversed course and started to ease.
Still, widespread pessimism could very well dominate the markets through the rest of the year, and any further slippage in the global growth outlook would put additional pressure on the markets. At that time, we would look to take advantage of better prices in investments that should benefit from the ongoing global rebalancing and related themes.
For now, we remain neutral on equities overall. That said, we still favor solid cash flow investments and select growth ideas in equities; believe that deploying a crossover strategy in fixed income can increase after-tax yield; expect housing-related investments to go through a sustainable uptrend; and expect long-duration real assets such as timber and farmland to attract foreign investment flows.
In the coming months we will look for opportunities to increase our weights in equities, given our positive long-term expectations.
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This publication is designed to provide general information about economics, asset classes and strategies. It is for discussion purposes only, since the availability and effectiveness of any strategy are dependent upon each individual's facts and circumstances. Always consult with your independent attorney, tax advisor and investment manager for final recommendations and before changing or implementing any financial strategy.
OTHER IMPORTANT INFORMATION
Past performance is no guarantee of future results.
All sector and asset allocation recommendations must be considered in the context of an individual investor's goals, time horizon and risk tolerance. Not all recommendations will be suitable for all investors.
Equity securities are subject to stock market fluctuations that occur in response to economic and business developments.
Investing in fixed income securities may involve certain risks, including the credit quality of individual issuers, possible prepayments, market or economic developments and yields and share price fluctuations due to changes in interest rates. When interest rates go up, bond prices typically drop, and vice versa.
Tax-exempt investing offers current tax-exempt income, but it also involves special risks. Single-state municipal bonds pose additional risks due to limited geographical diversification. Interest income from certain tax-exempt bonds may be subject to certain state and local taxes and, if applicable, the alternative minimum tax. Any capital gains distributed are taxable to the investor.
Mortgage-backed securities are subject to credit risk and the risk that the mortgages will be prepaid, so that portfolio management may be faced with replenishing the portfolio in a possibly disadvantageous interest rate environment. Any capital gains distributed are taxable to the investor. A portion of the income may be taxable.
International investing involves special risks, including foreign taxation, currency risks, risks associated with possible differences in financial standards and other risks associated with future political and economic developments.
Global investing poses special risks, including foreign taxation, currency fluctuation, risk associated with possible differences in financial standards and other monetary and political risks.
Investing in emerging markets may involve greater risks than investing in more developed countries. In addition, concentration of investments in a single region may result in greater volatility.
Stocks of small and mid cap companies pose special risks, including possible illiquidity and greater price volatility than stocks of larger, more established companies.
There are special risks associated with an investment in commodities, including market price fluctuations, regulatory changes, interest rate changes, credit risk, economic changes, and the impact of adverse political or financial factors.
Tangible assets can fluctuate with supply and demand, such as commodities, which are liquid investments unlike most other tangible investments.
Investments in real estate securities can be subject to fluctuations in the value of the underlying properties, the effect of economic conditions on real estate values, changes in interest rates, and risks related to renting properties, such as rental defaults.
An investment in a hedge fund involves a substantially more complicated set of risk factors than traditional investments in stocks or bonds, including the risks of using derivatives, leverage, and short sales which can magnify potential losses or gains. Restrictions exist on the ability to redeem units in a hedge fund. Hedge funds are speculative and involve a high degree of risk.
Treasury bills are less volatile than longer-term fixed-income securities and are guaranteed as to timely payment of principal and interest by the U.S. Government.
Dividend payments are not guaranteed. The amount of a dividend payment, if any, can vary over time.
Diversification does not ensure a profit or guarantee against loss.
Breakdown reflects ratings from Standard & Poor's, Moody's and/or Fitch Ratings. For additional information on ratings, please see www.standardandpoors.com, www.moodys.com, and/or www.fitchratings.com
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