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Bank of the West favours equities over bonds and alternatives for 2013 portfolios

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As the debt ceiling debates approach in February, Bank of the West’s wealth management group has shared its investment perspective and market commentary for 2013 portfolios. 

The wealth management group’s investment advisory and management team (IA&M), led by Don Silva and Wade Balliet, handles portfolio management for the bank’s affluent and high net worth clients.

"While actions taken by Congress at the end of 2012 will make the 2013 tax season a bit easier, we, along with the rest of the world, are watching whether a broad agreement to trim USD4trn from the nation’s debt over ten years can be achieved," says Balliet. 

The team is positioning clients’ portfolios accordingly, by removing some volatility while continuing to position for growth with a slight overweight in the equity asset class. 

According to the team, following are four of the major themes guiding its outlook for the coming year:

1.    The US continues its domination, but not for long

The US market will continue to outperform developed markets in the early months of 2013, yet the expectation of 2.0 to 2.5 per cent GDP growth may not be enough to keep US equities in the lead. As the European recovery begins, the team projects Europe will exit the current recession in late Q2 or Q3 of 2013.  While the team does not expect Europe to have a significant spike in growth, they do expect the pace of economic output will turn positive in the second half of the year and that the opportunity for a recovery in both economic growth and earnings may push the developed international markets asset class ahead of the US market from a return standpoint in 2013.

2.    A preference for China and emerging markets

According to the IA&M team, China’s growth rate may be bottoming and will likely rebound in 2013. Both domestic growth and exports should see positive gains as the year unfolds. Infrastructure spending and housing gains should generate enough momentum to sustain growth within the country’s borders. China should also be the benefactor of economic improvements in the US, Japan and Europe, which can be expected to provide some accelerant to the export story. The combination of continued strong domestic growth and a recovery in export growth should help the sentiment improve with regards to China, and this should also serve as a catalyst to renewed interest in the emerging market class as a whole.

3.    The debt ceiling and possible subsequent downgrade cause concern, uncertainty and volatility

While the Treasury Department has said it will undertake "extraordinary measures" to raise cash in order to meet government obligations, the team believes these efforts will not solve the extended need to raise the debt ceiling for both 2013 and 2014. According to the team, the debt ceiling debate will bring to the forefront the US credit quality and willingness or ability to service their debt.

4.    A favourable outlook on international fixed income

The IA&M team is moving toward international developed sovereign and corporate debt and adding to emerging market debt in lieu of current domestic debt holdings. The team also trimmed taxable municipal exposure in favour of tax-exempt municipal bonds. According to the team, dynamic diversification is paramount to investor success within debt market investing, as the distortion between asset classes continues to evolve and real yield is harder and harder to find.

"In summary, taking some profits on US equities and being extremely tactical should provide a smoother return pattern during these times of policy uncertainty," says Balliet. "Longer term, we believe international stocks and debt may have the opportunity to outperform the US market in the second half of 2013.  Our preference would be to favour emerging market economies, particularly China, as they should draw more investor attention in the new year.”

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