Market Outlook 2013
We have been pleasantly surprised by the recent U.S. economic numbers and in recent months a number of things have reduced the probability of recession including the Federal Reserves new Quantitative Easing Program. Although the election is over, uncertainty over the outlook for federal taxes and spending remains a drag on consumers and businesses. Corporations now sit on over $1.5 trillion in cash while investors remain largely on the sidelines. We expect that the Obama Administration and Congress will reach an agreement on the “fiscal cliff” with a deal over the next few weeks that postpone most of the tax increases and spending cuts. We feel that the economy should then pick back up as the gradually improving job market along with moderate income growth will support consumer spending gains. The housing market will continue to gain support from the Federal Reserves highly expansionary monetary policy as mortgage rates remain near record lows. Furthermore, we believe inflation should remain tame as U.S. energy production will continue to expand and; in turn lower gasoline prices will boost after-inflation incomes, at least in the near term, supporting real consumer outlays. In addition, as credit standards slowly ease, the consumer; accounting for two-thirds of the economy, will continue to be the driving force behind the U.S. economy. This improved economic growth and the steadily improving labor market will provide a solid base for equity gains longer term.
We believe emerging markets will also re-accelerate in 2013.The Chinese economy should grow at around 8.0% as investment picks up through increased infrastructure spending and as we see continued signs of stabilization in the export sector. More broadly, Brazilian growth is expected to more than double to around 3-4%, while India is expected to grow 6.5% next year from 5.5% in 2012. Russia should maintain its current growth of around 3.5% into next year. The broader European economic and debt crisis is certainly not cured, but it appears to be entering another period of remission.
These benign macro drivers, coupled with attractive valuations, provide support for the global equity market in 2013. The potential for economic improvement is not the only reason for retaining or broadening exposure to riskier assets. The prices of smaller companies equities’ also respond more aggressively to underlying economic trends than the larger-cap companies.
Looking ahead we think investors will continue to rotate out of bonds and into equities pushing the S&P 500 to a record 1600 by year end. We believe that easy monetary policies will continue and gold should climb to over $2000.00 an ounce by the end of 2013 and continue to move higher. We feel that average oil prices will ease in 2013 on greater supply and trade in a range between $80 and $95 per barrel in the US.
So what now?
We have been in an era of anxiety because of the fear of a second Global Financial Crisis and there are companies developing world-class assets trading at pennies on the dollar. Currently there is a huge amount of cash on the sidelines and even more in U.S. Treasuries generating a negative return after inflation. We expect some of this money to flow back into the small-cap market and riskier assets. We are taking advantage of this opportunity and investing in select high-impact special situation investments. Our advice tο οur subscribers іѕ tο ignore thе nervousness οf thе times, remain patient, аnd hаνе a long term outlook. Frοm οur experience, thе road tο successful investing іѕ іn finding grеаt businesses: thе ones thаt саn mаkе hugе profits аnd grow dramatically even іn today’s economic environment. As always it is important to keep some cash in reserves for extraordinary opportunities.
All of us at Undiscovered Equities hope you had a great holiday season and we wish you success and prosperity in the New Year!
Please keep in mind that if you have any questions or suggestions do not hesitate to send us an email or call us at 1(800) 404-8982. We’re always on call and ready to help.
Stay tuned! We will have our top 10 investment ideas for 2013 ready for our subscribers next week!
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