While many strategists used the 10% rise in stocks in 2013 first three months to boost their 2013 S&P 500 targets, others adopted a more wait-and-see approach, and stuck to their original forecasts.
The New High coincided with a precarious time in the market cycle — just before the release of first-quarter earnings for most of the S&P 500 and at the start of the year’s traditionally most bearish six months.
With that in mind, REO Capital turned to two strategists who not only ranked among the best S&P 500 forecasters in 2012 but who have also not modified their original 2013 predictions in the light of market gains, asking them what they expect for the rest of the year and what advice they’re giving clients.
Starting with the most bearish forecast, Gina Martin Adams sees the S&P 500 ending the year at 1,390 down 11% from Thursday’s close. In 2012, her beginning of the year forecast of 1,360 was less than 5% short of the year end 1,426.
The sell-side strategist expects weak corporate earnings growth and the potential for the Federal Reserve starts scaling back measures in the second half of the year as major headwinds for stocks.
“Another aspect to look forward to is the market tracing a top, so your best performing sectors are defensive,” she said. “Even though they’ve led, they’re pretty well positioned.”
Defensive sectors including health care, consumer staples and utilities have been the year’s best performers so far with gains of between 12% to 16%, and Adams expects that trend to continue as investors search for yield.
On the other hand, a stronger U.S. dollar and economic weakness in Europe will likely squeeze earnings for companies with a large international exposure, she said. That means staying away from sectors such as technology, materials, energy, and industrials. For those sectors, “the fundamental backdrop is unfortunately still quite weak, the dollar rally works against those sectors, and they’re most exposed to Europe,” she said. “I think it’s tough times for international earnings.”
Brian Belski’s track record in predicting the S&P 500 has been fairly solid over the past few years. His 1,400 forecast, made while he was at Oppenheimer, fell short of the 2012 close by a handful of points. When he joined BMO in April, he was forecasting 1,425, a point shy of the 2012 close. His forecasts for 2010 and2011 were within less than 5% of the benchmark’s finish for those years.
The strategist is holding onto his 2013 S&P 500 target of 1,575, and sees the recent spate of analysts raising forecasts as a fairly good contrarian indicator. Like a baseball pitcher trying to tinker with his form mid-game, many under invested investors are straying from their discipline to chase outperformers, and the results are poor at best, he said.
That also applies to trying to time the market. If you’re going to invest, it’s important to stay invested because missing just a few of the market’s strongest days will slash your overall returns, he said. Calculating the S&P 500’s annual performance since March 2009, Belski found an average 22.7% annual rise in the index. But eliminating the S&P 500’s three best days, the yearly gain slumps to 9.2%. Take out the best five days and you pocket just 3.1% annualized.
Belski says investors need to go beyond just parking their money in defensive sectors in what he considers a more active stock picking market. Rather, he suggests investors should take a tactical approach over the historically bearish second and third quarters. Since 2010, the S&P 500 has averaged a 7.4% gain the first quarter, followed by a 5.2% loss in the second quarter, a 0.7% gain in the third quarter, and a 6.8% gain in the fourth.
Belski’s tactical approach is to “rent” selective defensive strategies rather than own defensive sectors. The way to do that is by focusing on stocks with high dividend yields, low volatility, and a narrow earnings estimate dispersion.
REO Capital Predicts that the attitude regarding Limited Partners Investing in Private Equity versus Stocks in the Global Market is changing. REO Capital predicts that in 2013 and 2014 a greater allocation will be made to Private Equity Funds!
To back up this prediction we have enclosed some findings from EMPEA’s 8th Annual Global Limited Partners Survey in April 2013 collected the views of 106 LPs from 28 countries around the world to better understand their changing attitudes toward private equity investing in emerging markets. This study provides EMPEA Members and the broader industry with a greater understanding of how LPs view the asset class, how their attitudes have changed over time, what their plans are for investment and what factors will shape the future of private equity investment in emerging markets.
Key findings include:
1. Three-quarters (75%) of LPs expect their commitments to emerging markets to increase over the next two years. By contrast, only 26% of LPs anticipate they will expand their investments in developed markets over the same time period.
2. 72% of LPs expect 2011-vintage EM PE funds to deliver net returns of at least 16%, compared with only 26% of LPs believing the same of developed market PE funds.
3. More than half of LPs (57%) expect that emerging markets will account for 16% or more of their total PE allocation in two years’ time.
Join us at REO Capital to discover which Private Equity Funds will be ahead of the curve when the hundreds of Billions of dollars presently sitting on the sidelines is invested in some of the Private Equity Funds we represent for various Capital Raises!
John Denes
CEO
REO Capital, LLC
johndenes at reocapitalllc dot com
248-313-9966
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