Shaping a portfolio for 2013 (vi): putting the pieces together

another up year in 2013?   …most likely,

…though not by a huge amount.  Earnings growth for publicly listed companies in the US is likely to be up, but not by as much as in 2012.  I’m thinking up 7%, up 8% for the S&P 500.  Add a dividend yield on the index of, say, 2.5% and the likely total return from owning stocks this year is around 10%.

I find it hard to identify any obvious–or not-so-obvious, for that matter–macroeconomic factors that might upset the apple cart. Continuing partisan infighting by the White House and Congress that delays or derails the effort to get public finances in the US under control is my biggest worry.  I’m not sure how to quantify that and incorporate it into strategy, however.  I think both positive and negative developments will be reflected through expansion or contraction of the market PE multiple, rather than in changes in the composition of corporate earnings.

the worst is probably over in the EU,

as the area moves in fits and starts toward closer fiscal union.  Europe is still in recession, though, so no aggregate economic growth until the second half.

The surge in EU markets that has pushed them up by about 25% over the past six months in anticipation of further concrete structural reforms out of Brussels/Berlin may well be over for now.  If so, markets may move sideways in the absence of further political progress.

currency or stock price?

Financial markets can respond to further positive political developments from Brussels/Berlin either by bidding up stocks or by bidding up the euro.  I think it’s impossible to know the proportions of one or the other that might occur.  How the markets react to news makes a difference, though:

–The latter would be especially good for US-based companies that have large EU exposure, like personal care or staples firms.  But it would be bad for EU-based multinationals that have large exposure outside the EU, whose foreign-based profits would be worth less in euros.

–In in the former case, the relative beneficiaries would be reversed.

I think the EU is a place to underweight this year.  I’m choosing to hold one or two EU-based multinationals.  So far, I’m keeping with the UK, on the idea that £ is unlikely to be a strong currency, except against the ¥.

the US isn’t this year’s economic locomotive

Last year, we weren’t spoiled for choice, as they say, in the search for countries whose economies would be maintaining or increasing speed.  Emerging nations were downshifting to prevent overheating.  And the EU was falling under the weight of Greece, Spain and Italy.  So the US was pretty much it.  This year, in contrast, the US appears to be in the early stages of settling in for a long period of fiscal retrenchment.

And,

emerging markets are back

Together, higher interest rates and a cooling off of the developed world have lessened the danger of economic overheating in developing nations.  China has also passed through its once in a decade policy interregnum while the leadership of the Communist Party changed.  Throughout the developing world, as a result more growth-friendly economic measures are being put into place.

This should be good for stocks in the Pacific Basin, especially for China-based companies listed in Hong Kong.  Industrial commodities, with the possible exception of energy, should be perking up, as well.  So, too, US-, and, depending on the €, EU-multinationals with emerging markets exposure.

the US–all about focus

I think outperforming the S&P 500 during a belt-tightening year will be all about making choices, in two senses. The first is to opt for firms with businesses outside the US rather than inside.  The second is to laser in on hot spots of domestic growth that develop on an otherwise blah landscape as consumers try to make their dollars stretch a little farther.

Houses and home appliances are in, jewelry and restaurant meals are out.

Lower income families are, as usual, out.  So, too, are the chronically unemployed.  The over-55 set, whose incomes have been sacrificed for a half decade to fight the financial meltdown, continue to be on the outside looking in, as well.   For this year, add the very wealthy to this list, based on their increasing taxes.

lower energy prices in the US

This is good for consumers, good for the developers of unconventional sources of oil and gas, good for industries, like chemicals, that use lots of petrochemicals for fuel or feedstocks.  Bad, on the other hand, for holders of traditional oil and gas assets, especially in the US.  (More about this phenomenon in a later post.)

Check out last year’s putting the pieces togetherif you want.

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