At Pioneer Investments, we believe that global economic conditions are moving toward a phase of gradual improvement, thanks to a likely resolution of the “fiscal cliff” issue in the U.S., bottoming out of the Chinese economy, and stabilization of the euro zone. A summary of our thinking follows. For a more detailed discussion, see my 2013 Global Outlook.
In the U.S.:
- Positive signals from the real economy are emerging, mainly in the housing market, and we believe that the U.S. Federal Reserve will maintain an accommodative policy to support the unemployment reduction.
- We believe the market uncertainty linked to the resolution of the fiscal cliff should be temporary. In the longer term, the challenge of managing exploding public debt remains an issue.
- The ECB has cut the tail risk of a collapse of the single currency by introducing the OMT mechanism last summer, and the peripheral countries have made some progress in implementing structural economic reforms.
- As the additional requirement of fiscal adjustment in the peripheral countries will be lower than in 2012, economic growth may move back into positive territory in the second half of 2013.
- The monetary policy will remain very accommodative to avert the credit crunch.
- The economy is bottoming out and there is still room for additional fiscal and monetary expansionary measures to prevent a further slowdown.
- We see a more challenging scenario in the long-term, as the country shifts from an investments-led to a consumption-led economic model.
- The new political leadership will need to move beyond the rhetoric of announcing economic reforms to actually implementing them in crucial areas.
Investment Themes: Equities, High Yield and Emerging Markets Bonds
We believe that a strategic shift into equities is going to be the major decision facing investors in 2013 and beyond. In particular, we see very interesting opportunities in European equities, which currently represent the most under owned equity market among global investors.
We see opportunities in high yield both in the U.S. and in Europe. The yield offered by these securities is attractive and default rates are not expected to increase in the near future.
In the search for yield, emerging markets bonds should continue to play a role in investors’ portfolios. Most emerging market governments have pursued sound economic policies in the last several years, building foreign reserves and controlling internal and external deficits. This has also translated into a much lower volatility of this asset class in comparison to the past. We acknowledge that spreads on sovereign emerging market bonds have tightened to a large degree and currently have limited room for further compression. Therefore, we favor extending our exposure to the emerging market corporate bond sector, where the credit quality has increased considerably and valuations are more compelling.