What investors can look for in 2013

December 5, 2012

By Matthew Goldstein and Jennifer Ablan

Big money managers do not always agree–that’s what makes a market–but if there was one consensus coming out of our just concluded Reuters Investment Outlook Summit, it’s that next year will probably be another bang up one for the bond market.

Now the credit markets will have a tough time repeating the kind of numbers put up this year, especially with the Federal Reserve doing its darndest to push down borrowing costs and yields by buying  mortgage backed securities and even Treasuries. Speaker after speaker who joined us in New York said “junk” bonds, corporate debt, mortgage- and commercial-backed securities and even Treasuries “on a trading basis”  should do well for no other reason than credit markets still aren’t showing anything close to the kind of froth we saw in the run-up to the financial crisis. The sense is that it may be another 2 or 3 years before we see excesses build up in the system again.

Oh sure, there are exceptions such as, bonds being sold by companies to pay special dividends to their private equity backers (several speakers said to avoid these). Other guests also are wary of the junk bond market, noting with yields coming down the risk to reward premium isn’t looking as good as it did earlier this year. And at least one speaker said he would avoid mortgage REITS because there’s too much leverage baked into their holdings.

For the most part, nearly all of our guests said corporate credits including the junk bond market will turn in solid—not spectacular—performance in 2013, noting with yields coming down the risk-to-reward premium isn’t providing the kind of juice as it did earlier this year to produce returns.

As for stocks, the verdict is like every year–cautiously optimistic. Some say the stock market will do OK next year as the politicos in D.C. can get their act together and really deal with taxes and budget cuts (a big if). Other says if the economy continues to revive, stocks should post decent single-digit returns.

Then again, many more see a lot to worry about next year what with Europe still not fixed, the U.S. deficit rising, millions of U.S. homeowners still underwater on their mortgages and events remaining terribly unsettled in the Middle East. They say the rollercoaster macro picture doesn’t look good for stocks.

Then again, equity markets have rallied strongly this year in spite of many of those same worries. So who knows for sure.

As for the U.S. housing market, there’s also division on just how strong the revival is. But  there’s a lot of agreement that for institutional investors buying foreclosed homes as a long play on housing, the big money is to be made in the next few years. So look for the spending spree on foreclosed homes by the likes  of  Blackstone, Colony Capital, Carrington and American Homes R Rent and smaller players to continue through at least the first half of 2013.

And of course remember, investing predictions are always subject to change.

For a cool PDF package of the highlights of the summit, including stories produced by our colleagues in London and Asia, click here.

And for a link to special video interviews we did with short seller Carson Block, OWS Bank leader Cathy O’Neil, bond guru Dan Fuss, Avenue Capital Marc Lasry, Wall Street sage Henry Kaufman and FBI agents David Chaves and April Brooks click here.





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