Research by the BlackRock Investment Institute suggested that more risks could emerge in safe-havens such as core government bonds while the assets that investors have avoided this year may start to become more attractive.
In its outlook for the next year, the institute argued that the world’s central banks could start to ease up on aggressive monetary policy if economic conditions show signs of sustained improvement. It added that the US Federal Reserve could take its foot off the accelerator in the second half of 2013.
“Markets only need a whiff of a Fed reversal to empty some of the vast store of investor money in cash and low-yielding fixed income assets and put it into equities,” the report said.
“Quality businesses and dividend stocks would likely underperform leveraged companies, as the influx could result in a temporary ‘dash for trash’.”
Equities such as high-quality emerging market companies, businesses linked to growth in consumption, cheap European firms and US mega-caps are among the stocks expected to do well in this environment.
BlackRock also highlighted Japanese equities, which have underperformed and seen many fund managers run underweight positions, as a potential contrarian play for 2013.
It noted that Japanese companies are “very, very cheap” against their own history and relative to other benchmarks and may benefit from monetary easing if there is a change of government this month.
“Casualties [of reduced global monetary stimulus] would be ‘safe’ assets such as government bonds of the United States, UK, Germany and other eurozone core countries,” the outlook continued.
“Duration has risen and convexity has fallen: not a winning combination in fixed income. It takes just a miniscule rise in yield to trigger sizable bond price losses. There is a danger in safety, especially because most investors are positioned for rates to be low for long.”
This risk means BlackRock is going into the new year disliking sovereign government debt and investment-grade bonds. Where it does opportunities in fixed income are in high-yield, emerging market debt and eurozone periphery bonds -especially from Spain and Italy.
Russ Koesterich, BlackRock’s chief investment strategist, concluded: “The definition of a safe haven is likely to switch somewhat in 2013.
“Some of the things thought of as a safe haven may be revealed as less safe while the asset classes that investors have avoided may be the ones able to outperform in 2013.”