(April 4, 2013) — Equities will continue to outperform for the next 12-24 months, but investors should particularly seek out JGBs – Japan, Germany and bank stocks for the spring, according to Bank of America Merrill Lynch.
Chief investment strategist Michael Hartnett also recommended the US dollar as a key buy, along with a recommendation to drop levered areas of the bond markets in a note to investors today.
A risk/equity correction is likely from the second quarter of the year, with bonds and commodities continuing to take a hammering, he added.
The situation in North Korea, a country that is surrounded by nations that own 25% of all outstanding US Treasuries, is another unknown and investors should take care, he said.
The bank’s top 10 trades for spring are:
1. Own volatility in Q2
2. Telecom & Utilities are the best defensive contrarian equity play
3. Sell Treasuries into Q2 strength
4. Long the US dollar versus commodities
5. High yield over high grade in 2013
6. Own Japanese financials
7. Buy German equities on Q2 weakness
8. Long US financials, short Canadian financials in 2013
9. Long US industrials, short European industrials
10. Long BRIC resources versus Emerging Markets in Q2
Hartnett’s suggestion of an equity correction ties in with much of the market’s mood on April 4, but ING Investment Management said well-known brands and traditional “safe” equities are worth the premium they demand.
Ad van Tiggelen, senior investment specialist at ING Investment Management said high profile growth stocks in Europe were still good value, despite their seemingly demanding costs.
This is because interest rates in the core of the Eurozone remain stubbornly low and because many of the current global brand names have a high exposure to emerging markets, giving them “a huge benefit in comparison with domestically focussed companies”.
He added: “This was different in the 1970s, when the US and Europe themselves had emerging-market-characteristics and the iron curtain still existed. In those days, all western companies competed in the same market environment.”
Merrill’s play for banks comes at an interesting time for the sector, which is hanging at the precipice of further financial reform and a greater push towards improved corporate governance. Many asset managers have questioned whether the unknown unknowns about the sector have been priced in correctly.
Mike Everett, governance and stewardship director at Standard Life Investments, echoed many investors’ thoughts when he said that while increased levels of stewardship were welcome, it was necessary “to be aware on the impact of unintended consequences arising from legislative change”, such as requiring much higher levels of bank capital, which runs against the call for banks to lend more to hard-pressed consumers and businesses.