Market Perspectives - July 2013

2013 midyear outlook: Time to change your focus?

Asset allocation

By Brian Jacobsen, Ph.D., CFA, CFP®, Chief Portfolio Strategist

Investment horizons

For investors with an investment horizon of three years or longer, we recommend a strategic overweight to equities relative to fixed income. Short-term, over the next three months, we think investors may still be rewarded by looking at higher-yielding fixed-income investments as well as growth-oriented equities. While there could be an equity market retreat, we don’t expect that any loss will be deep.


Global equities still look attractive from a valuation perspective. We think a lot of investors are fearful of outcomes that have a low likelihood of occurring over the next six months to a year. For example, the eurozone is not likely to break up, the U.S. is not likely to go bankrupt, and China is not likely to implode. Those seem to be the negatives that people obsess about. There are also the positives that people might be a bit too excited about. For example, fracking technology may eventually make the U.S. energy independent, but it’s not likely to happen over the next year. Emerging markets economies may raise billions of people into the global middle class (defined as making between $1,000 and $12,000 per year), but that’s likely going to take time. In the interim, some countries may go from emerging to submerging. This is why we urge investors to diversify, but with an eye toward growth. The future might not be as bad as you fear, but neither may it turn out to be as great as you hope.

Value versus growth

Choosing between value and growth is like choosing between walking to the store and breathing. Why not both? We think pessimism about the future—of which there is plenty—has contributed to mispriced growth opportunities that nicely blend value and growth characteristics.

Large caps versus small caps

Large-cap companies are probably better positioned for global growth than small-cap companies. That doesn’t mean small- and mid-cap companies should be ignored. However, we think it’s more important to be discerning about the economic exposure of a company rather than judge it solely on its size. Mid-cap stocks may be a bit like the middle child of a family who is feeling overlooked. Perhaps a large/mid blend would be appropriate.

Fixed income

Based on our economic outlook, we believe that interest rates are likely to remain low for the next year. This presents an opportunity for investors to take on additional duration and credit risk. Provided the economy does not dip into a recession, default rates should not increase, meaning increased yields on higher-yielding debt may provide better income to investors than the lower-credit-risk issues would.

Asset allocation summary table1

Understanding the table

Neutral positioning for equities is the percentage of market capitalization meeting the classification criteria of a broad market index. Because the fixed-income market tends to be dominated by sovereign debt, we chose to represent the neutral weight as 50%. The strategic positioning represents our guidance for investors with a time frame of three years or longer. The tactical positioning in the pie charts below represents our guidance for investors with a time horizon of less than one quarter.

Equity recommendations


Strategic recommendation


Tactical recommendation

  Developed equities/emerging markets equities


Emerging markets have rebounded—but not completely. There is still likely long-term growth as countries make structural and political changes. Not every emerging markets economy is going to emerge. Some may submerge.


As the developed economies slowly grow, emerging markets are like high-leveraged plays on that growth. For example, Mexico is almost an amplified way to invest in U.S. growth.

  Developed equities/emerging markets equities
  U.S. equities/non-U.S. developed equities


The consensus seems to be that the U.S. is doomed to low growth. We think this stance ignores the ability of U.S. businesses to adapt and thrive in a changing world.


Valuations are attractive outside the U.S., but they could get more attractive with the political challenges they face. Growth estimates of the U.S. economy are likely too negative.

  U.S.equities/non-U.S. developed equities


Look for real growth, which could be in traditional value sectors. We think the theme for the next few years will be to identify mispriced growth opportunities. That means looking for value stocks in growth sectors and growth stocks in value sectors.


Industrials, parts of health care (for example, biotech), and technology (not just information technology) remain our favorite areas. Growth with value characteristics or value with growth characteristics seems to offer the best investment opportunities.




Overweight large-cap stocks because they tend to have the dominant market share and cash to survive a volatile environment.


Large-cap stocks are attractive, but some large-cap companies may be tempted to overpay for acquiring small-cap companies.



Fixed-income recommendations


Strategic recommendation


Tactical recommendation

  Fixed-income duration


The Fed claims that rates will remain low until unemployment falls below 6.5%. We think that could happen before the Fed’s forecast of mid-2015. Thus, we believe you can ride low yields for a while, but not forever.


The Fed and other central banks will likely keep short-term rates low until the end of 2014. Thus, we think there is little reason to fight the central banks.

  Fixed-income duration
  Credit risk exposure


Default rates are low, but investors need to be careful about new issuances. Some credit risk might not be worth taking on.


We think default rates will continue to fall, which should be good for high-yield debt. But, it pays to be cautious, as junk issuers are getting too good of a deal.

  Credit risk exposure
  Fixed rate/floating rate


We prefer fixed-rate short-term debt over floating-rate debt. Until the end of 2013, buying floating-rate debt might be like buying insurance for an unlikely event.


Some floating-rate debt may be prudent, but it really depends on the credit quality of the issuer. In general, we’d prefer to leave the decision to a portfolio manager who does bottom-up credit analysis.

  Fixed rate/floating rate



  • Not FDIC Insured
  • No Bank Guarantee
  • May Lose Value