Mutual fund firm T. Rowe Price said now is the time buy equities and predicted that real gross domestic product will grow 2.25% in 2013 at a press briefing in New York today.
While the U.S. fiscal cliff combined with uncertainty over U.S. policy and regulations, the European debt crisis and China’s hard landing have dampened investor sentiment, John Linehan, T Rowe’s director of U.S. equity, said, the market headwinds will diminish in the coming year. Linehan said there is a “tug of war” between these headwinds and market tailwinds such as strong corporate fundamentals, attractive valuations, decisive monetary policy actions to support economic recovery, improving housing and labor markets and a deleveraging of consumer debt. In the end, he thinks the tug of war will prove positive for stocks.
The fiscal cliff may cause a small recession in early 2013, but politicians will solve the problem, lowering the deficit and sparking a rebound in the second half of the year, said Alan Levenson, T. Rowe’s chief economist. He expects the final deal will end the Bush tax cuts for upper income earners, the 2% payroll tax holiday and extended unemployment benefits. Both analysts expect the tax rate on dividends to rise. Levenson said real gross domestic product should grow 1.5% in the current quarter and 2.25% next year. He expects the unemployment rate to fall 0.3 to 0.5 percentage points in 2013.
Stock chief Linehan points to a few reasons to be cautiously optimistic. He said the price-to-earnings ratio on the S&P 500 is a low valuation of 13. The market’s current low valuations combined with strong corporate balance sheets suggest stocks are poised to perform well from here, he said.
He also said the heavy net inflows into bond funds since 2007 will reverse as retail investors seek higher returns and begin to embrace risk. Linehan finds the following investment themes to be attractive:
- Companies with exposure to emerging market consumers.
- Derivative plays on the housing recovery.
- Companies with growing dividend payments.
- Providers of new treatments in healthcare.
- Companies with exposure to mobile and cloud computing.
- Compelling “sum-of-the-parts” valuations in energy.