So far this year, the equities markets have rallied, fixed-income assets are taking a beating on rising raetes and commodities have underperformed. Consequently, State Street Global Advisors believes exchange traded fund investors should begin to take more careful exposure considerations.
“With real GDP growth of 3.4%, the SSgA Economics Team continues to expect that 2013 will see an improvement in global growth relative to the 3.2% delivered in 2012,” writes David B. Mazza, Head of ETF Investment Strategy at SSgA Americas, in a research note. “However, the team continues to expect major divergences across and within regions to be the norm.”
SSgA, though, expects that the U.S. economy will expand 1.8% this year, a slower-than-anticipated growth due to fiscal tightening.
In Asia, Japan is expected to grow 1.3% this year as the Bank of Japan adopts a 2.0% inflation target and implements aggressive stimulus measures. China is expected to grow 8.2% but could still face structure issues.
In the Eurozone, SSgA analysts anticipate greater stability. Still, European economies are expected to contract 0.4% in 2013.
“These forecasts are supportive for the continued positive performance of risky assets, but potentially at a less robust pace than witnessed for the first five months of the year,” Mazza added. “Going forward, investors may begin to look more closely for signs of how central banks may respond to both positive and negative economic developments.”
Mazza also provides a general outlook on equities and fixed-income assets in three different market conditions for the rest of 2013:
- Base case. The markets will remain relatively unchanged, compared to the start of the year, due to continued deleveraging and central bank policies. Additionally, investors will stick to income generation in addition to capital appreciation. For example, U.S. company stocks that have consistently increased dividends along with growth opportunities like financials, consumer discretionary and technology stocks. Additionally, investors will shift over to short-duration bonds in both investment grade and speculative-grade credit qualities. [Investors Selling Bond ETFs as Rates Rise]
- Bull case. High-beta, low-yielding companies will take the lead in a bullish market condition. Cyclical sector stocks, like industrials, materials and energy, would benefit the most in these conditions. Emerging markets may also do better than the developed economies. Looking at asset classes, small-caps would outperform their peers. In the fixed-income space, spread compression would lift returns on high-yield bonds and other higher-beta segments.
- Bear case. Investors would seek out non-cyclical sectors, like utilities, health care and consumer staples. Low-volatility strategies would also benefit from this shift to low risk. Additionally, high-quality, investment grade debt would take on another round of save-haven investments.
For more information on the broad markets, visit our S&P 500 category.
Max Chen contributed to this article.