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Get ready for a 'Great Rotation' in stock markets

Stock market strategists at Bank of America Merrill Lynch think 2013 could be another good year for investors if we get the '3 Rs'.

 
Get ready for a 'Great Rotation' in stock markets

Bank of America Merrill Lynch, the US investment bank with possibly the most unwieldy name in financial services, has provided a reassuringly clear and positive outlook for stock markets in 2013.

Speaking at a press conference in London today to launch its global research team’s forecasts for the year ahead, John Bilton, European investment strategist, thought next year would be dominated by three ‘Rs’.

These are not the reading, writing and arithmetic beloved by pedagogues of old, but ‘Rotation’, ‘Reflation’ and ‘Regearing’ which together could paint a benign picture for shares in 2013.

Rotation’ refers to the belief that investors will tire of the increasingly low yields from G4 nation government bonds and will turn decisively to less expensive and higher yielding equities and investment grade corporate bonds.

Reflation’ refers to the prospect of more quantitative easing and money printing by central banks in the UK, US, Europe and Japan.

For example, Bank of America Merrill Lynch believes the Federal Reserve will pump another $2 trillion into the US economy over the next few years, maintaining the downward pressure on treasuries (US government bonds). This will in turn force more investors to embrace riskier asset classes like shares because only they offer a genuine chance of a positive return.

Lastly, ‘regearing’ points to the prospect of more big companies using their financial strength and credit worthiness to borrow at all-time low rates of interest in the bond markets and then using that money to buy weaker rivals. Mergers & acquisitions are a big theme for the year ahead for the BofAML team.

None of these are new trends. In fact all three have been evident in what has been a remarkably good year 2012 for investors. Global stock markets have risen over 15% on average with similar gains in corporate bonds. Gains in government bonds have been a lot more muted but, at the other end of the credit spectrum, high yield, or ‘junk’ bonds from European companies that have been through a rough patch have soared over 27%. Gold has gained 11% capping off an unexpectedly sweet year for investors.

First, the fiscal cliff

However, what Michael Hartnett, chief investment strategist at Bank of America Merrill Lynch, says was a ‘stealth rotation’ in 2012 will become a more explicit ‘Great Rotation’ in 2013 as investors start to put the years of austerity behind them (even if taxpayers and workers continue to feel the pain for many more years to come).

First, however, we have to get through the first quarter of next year which the global strategists at this institution clearly think could be rocky as the US does indeed go over the ‘fiscal cliff’. Bank of America Merrill Lynch believes US politicians will avoid half of the $600 billion impact of automatic tax rises and spending cuts. That still knocks 2% off US economic growth leaving the world’s largest economy growing at just 1% in the first three months of next year.

After that, though, it could all be plain sailing, if the resolution of the fiscal cliff threat is accompanied by a further recovery in the US housing market; continued progress in the eurozone (with Spain finally asking for a bailout and kick-starting the European Central Bank’s ‘OMT’ bond buying programme); and unmistakable signs of a recovery in China that will pull other emerging economies along with it.

One more 'R' to finish

If that all happens, and it is a big if, the US economy could be growing at 2.5% in a year’s time, with the global economy humming along at around 3.2%. Developed world stock markets could post more impressive gains of between 10% and 16%, but bond markets could prove tricky with only volatile high yield and emerging market bonds offering a decent return. Gold, according to this bullish forecast, could hit $2,000 an ounce as inflation remains a danger in response to the continued monetary stimulus by central banks.

To finish the ‘R’ theme: if these other ‘Rs’ happen the biggest play on renewed global growth will be Russia, according to Michael Harris, equity strategist for the EMEA region. You have been warned.

If you would like to hear more forecasts and commentary about the year ahead watch this video on Investing in 2013

13 comments so far. Why not have your say?

Geoff Downs

Dec 11, 2012 at 17:17

The continuation of the policy that creates bubbles in equity prices. Investors will start to put years of austerity behind them, even if taxpayers and workers feel the pain for many years to come.

Raw capitalism for workers and taxpayers and soft socialism for the bankers.

You couldn't make it up.

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Rob Walker

Dec 11, 2012 at 17:42

We still get 3R's if they get it wrong....Regrets, Recriminations and resignations....it was ever thus!

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Mario via mobile

Dec 11, 2012 at 18:57

Don't forget Rehab!

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Geoff Downs

Dec 11, 2012 at 19:18

Or roulette.

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D.LAING

Dec 11, 2012 at 21:10

Rollercoaster Ride of Reversion to the mean...

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J Thomas

Dec 11, 2012 at 23:43

I'm not sure where these figures have came from but certainly the gold statistic is incorrect. Gold has not risen 11% in the past year, it has fallen by 0.65%.

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Frankie Dee

Dec 11, 2012 at 23:52

I have no doubt history COULD well repeat itself the way Bank Of America see 2013 sounds a bit like put the music on the party is starting up again.

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kenneth douglas

Dec 12, 2012 at 11:56

J Thomas is correct, gold has not risen, I am finding more and more articles from City Wire have flawed information.

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bb 42

Dec 12, 2012 at 12:23

If you Auntie had balls she would be your Uncle.

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Gavin Lumsden

Dec 14, 2012 at 11:25

Hi Kenneth and J Thomas, where are you getting your gold figures from? I may have used slightly old figures but the latest figures I got from Reuters show a gain of just over 8% year to date.

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Gavin Lumsden

Dec 14, 2012 at 11:56

Think I've got to the bottom of the issue with the gold price. I was using year to date figures, which show a gain. However, if you look at 12-month figures to the end of November you get a 1.2% fall in dollar terms and 3% fall in sterling as gold fell heavily at the end of 2011. Useful reminder that a small change in the dates can dramatically change results.

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J Thomas

Dec 14, 2012 at 15:47

Gavin

Thank you for your reply, indeed comparing YTD and 12 month figures will change the statistics by a substantial amount. As I buy and sell gold sovereigns on a regular basis I keep the live gold price on my computer for reference.

Let me add that I enjoy your articles, especially your in-depth insight regarding Standard Life shares, as a substantial holder they have been very good to me over the last two years.

Joe

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Jack Draw

Dec 17, 2012 at 17:08

very good reminder Gavin! most tom foolery is achieved through it!

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