Neuberger Berman Portfolio Managers See Shift Back To Fundamentals in 2013; Volatility, Uncertainty Should Moderate
January 3, 2013
Alexander Samuelson, Neuberger Berman, 212.476.5392, Alexander.Samuelson@nb.com
Anji Stewart, Neuberger Berman, +44 (0)20 3214 9013, Anji.Stewart@nb.com
NEW YORK, January 3, 2013 – Macroeconomic concerns around the globe, which dominated investors' thoughts and inhibited their actions in 2012, should become more muted in 2013, allowing for greater emphasis on security and industry sector selection across a range of asset classes, according to portfolio managers and strategists at Neuberger Berman Group LLC, one of the world's leading employee-owned money managers.
"The perception of vulnerability was always in the background, and it meant that investors kept their eyes on the macro," said Joseph Amato, President and Chief Investment Officer of Neuberger Berman. "Although there are continuing issues, we now have some confidence that we’ll get more stability in 2013, and that should present outperformance opportunities."
In the U.S., the world’s largest capital market, investors may expect a backdrop of modest economic growth of approximately 2%, Neuberger Berman managers and strategists forecast. That "could be better than a more turbulent expansion," said Alan Dorsey, the firm's Head of Investment Strategy and Risk. From an investment perspective, "slow and steady means businesses can plan and make rational decisions and investors can become less shell-shocked and more constructive about pursuing portfolio goals," said Anthony Tutrone, Global Head of Alternatives.
"A key implication of the slow growth economy is that active investing decisions become more important," Amato added. "On the equity side, companies that can expand their businesses through competitive advantages, cost efficiency or access to key markets should be differentiated. Currently, many of our equity managers favor global companies which tend to have meaningful operations in emerging countries."
In fixed income, investors will continue to search for yield, potentially beyond traditional areas says Brad Tank, Chief Investment Officer, Fixed Income. "We see various areas for potential diversification for investors that are willing to add incremental risk – in high yield bonds, bank loans, emerging market debt and residential loans. The whole exercise of finding yield requires a certain amount of creativity, a lot of research and broad expertise to effectively assess these pockets of the market."
Below are excerpts from the insights of various portfolio managers and strategists at Neuberger Berman. Their views on asset allocation, multi-asset class portfolios, fixed income, equities, and alternatives can be found in "Solving for 2013", an outlook available publicly on the Neuberger Berman website http://www.nb.com/solving2013. Neuberger Berman does not impose a "house view" and the report reflects the individual views of its portfolio managers.
- Asset Allocation: "One of the most important sources of macro-driven markets is the global impact of local policy uncertainties. Investors should be prepared for macro influences, but avoid letting them distort an investment strategy designed to achieve long-term objectives. We favor most risk assets over investment grade fixed income in 2013, with an underweight view on government securities in the U.S. and most of the developed world due to historically low yields and widening budget deficits that could increase the need for further borrowing. Elsewhere within fixed income, municipal bonds, high yield corporates and emerging market debt still appear to offer attractive opportunities for income-oriented investors." – Matthew Rubin, Director of Investment Strategy
- U.S. stocks: "Our general outlook for U.S. stocks is favorable, fueled by our expectation that improving fiscal health and a more confident consumer will support a more robust environment for business. Although large-cap stocks appear to have moved closer to fair value, we think valuations are still reasonable." – Leah Modigliani, Multi-Asset Class Strategist
- Developed international stock markets: "Central bank initiatives, strong corporate balance sheets and reasonable stock valuations are reasons for optimism about 2013… We see opportunities in companies developing productivity-enhancing technologies, and delivering health care innovations with the potential to reduce costs and improve outcomes. Growth of the middle class in the developing world is likely to drive demand for select consumer goods, as well as gas, oil and related infrastructure. As a result, we think oil explorers and oil services companies could benefit. Although energy and commodity prices may remain volatile, the lowest cost producers have attractive risk/reward profiles. We also see potential upside in inflation beneficiaries such as precious metals, agricultural commodities and specialty chemicals." – Benjamin Segal, Portfolio Manager, Head of Global Equity Team
- Emerging markets (EM) equities: "We believe it is important to distinguish between locally driven companies – in sectors such as health care, consumer discretionary and consumer staples, utilities, industrials and telecommunications – from those driven primarily by global factors, such as energy, IT and materials…A full 60% of EM market cap is made up of 'local' rather than 'global' companies. The fundamentals of these companies are somewhat insulated from the global slowdown, driven by secular growth in local demand. We think investors may be well served by seeking targeted local exposure. It's possible to find domestic businesses offering sustainable growth and strong returns, trading at attractive valuations, especially compared to multinationals, which offer investors a less targeted approach to EM growth." – Conrad Saldanha, Portfolio Manager, Global Equity Team
- Greater China stocks (mainland China, Hong Kong and Taiwan): "Chinese stocks languished for much of 2012 given investors' concern over China's slowing GDP growth. However, as we note the ongoing refocus of the Chinese economy, potential for growth in less developed regions in the country and greater market stability encouraged by an influx of foreign investors, we see opportunities that have been accentuated by low valuations. Clearly, ongoing risks bear consideration but, in our view, they are manageable with a longer-term perspective and a research-intensive investment discipline." – Frank Yao, Portfolio Manager, Head of Greater China Equity Team
- U.S. investment grade bonds: "Conditions for U.S. investment grade debt appear moderately favorable for 2013. Supporting the market, in our view, will be continued strong corporate fundamentals, reflected in balance sheets that are largely solid and flush with cash, along with ample liquidity and low borrowing costs. In addition, we believe technicals are generally positive and demand should be generally robust as the investment grade market provides more than 100 basis points of incremental yield over treasuries. In such an environment, we would expect to see modest spread tightening. From a sector perspective, we favor those areas that offer attractive yields and are not directly tied to global macro issues that remain in the marketplace. These include sectors such as cable-media, telecommunications, food, beverage, and tobacco. Utilities also seem appealing, given their limited exposure to global macro risks. In contrast, metals and mining, basics and non-corporate sectors are more vulnerable to cyclical shifts." – Andrew Johnson, Chief Investment Officer, Investment Grade Fixed Income and Thanos Bardas, Global Head of Sovereigns and Interest Rates
- Non-U.S. investment grade: "We believe the backdrop for non-U.S. credit is favorable for 2013. Corporate fundamentals are generally on solid footing and demand from investors should generally be strong given the incremental yield available from the credit market. In our view, the risks are largely focused on the outcome of the European sovereign debt crisis. In the non-U.S. dollar credit space, we would favor companies with the potential to grow their business, even if the recession in Europe is more drawn out than anticipated. From a sector perspective, food and beverage, tobacco and utilities appear attractive given their defensive properties. While the risks are elevated, we also favor the banking sector, where investors are being compensated with generous spreads. Higher quality core European banks seem a better choice than peripheral banks such as those in Italy and Spain." – Andrew Johnson, Chief Investment Officer, Investment Grade Fixed Income and Thanos Bardas, Global Head of Sovereigns and Interest Rates
- High yield bonds and bank loans: "Even after a multi-year run of strong performance, we believe that the high yield and bank loan markets look healthy entering 2013. Many of the factors that supported these markets last year remain in place, including strong fundamentals and a positive technical backdrop. With spreads implying a significantly higher default rate than we believe is likely, there could be modest spread tightening in 2013 on top of what we consider an attractive coupon in a low interest rate environment." – Ann Benjamin, Chief Investment Officer, Non-Investment Grade Credit
- U.S. municipal bonds: "Noting the combination of positive technicals and attractive valuations, we believe that prospects are good for positive municipal returns in 2013. However, uncertainties make it critically important to have a thorough understanding of individual municipal credits in order to invest in this segment of the fixed income market. There could be discussions in Washington, DC, regarding municipal bonds, but we do not expect to see any meaningful changes to their tax- favored status. That being said, we could experience periods of increased volatility in the municipal market, especially during the first few months of 2013, as these issues come into play." – James Iselin, Portfolio Manager, Head of Municipal Fixed Income
- Emerging markets debt: "After posting exceptionally strong results in 2012, external emerging market debt is likely to post more modest returns in 2013, with minimal shifts in yield levels, potentially leaving interest rate spreads as the main driver of returns. Valuations for emerging market external debt are richer than they were a year ago across the credit spectrum. We believe that the universe of higher yielding names that have the potential to drive spreads modestly lower is limited to a relatively small number of countries, including Venezuela, Argentina, Ukraine and, to a lesser extent, Lebanon." – Bobby Pornrojnangkool, Portfolio Manager, Emerging Markets Debt, and Ling Zhou, Associate Portfolio Manager, Emerging Markets Debt
- Private equity: "We anticipate that buyout activity will pick up now that the U.S. election is over, and that private equity managers will continue to access the loan and bond markets through 2013 for new and existing portfolio companies. We believe there continues to be a significant opportunity for private equity in emerging markets, especially among small- and mid-cap companies. Brazil, Colombia, Peru, Mexico and Chile are particularly attractive countries in Latin America because of their strong growing economies, stable political situations and increasing number and quality of local managers. In distressed… we believe that a weak global macroeconomic backdrop combined with significant uncertainty surrounding government policy will likely cause volatile market conditions, presenting numerous opportunities for distressed investors. Banks in the U.S. and particularly in Europe have an ongoing need to clear nonperforming assets off their balance sheets, in order to satisfy regulators and improve capital ratios." – Anthony Tutrone, Global Head of Alternatives
- Hedge funds: "While there have been material headwinds for hedge funds broadly, a number of strategies delivered strong absolute and relative returns for much of 2012, including RMBS (residential mortgage bond securities) and distressed debt… Managers were able to exploit structural or cyclical dislocations in their respective markets… We see the potential for continued success in these strategies. Other areas of opportunity include event-driven strategies, which could benefit from a potential uptick in corporate activity, and uncorrelated strategies such as fixed income arbitrage, statistical arbitrage and commodity relative value, which have the ability to capitalize on a number of different inefficiencies in today's capital markets. Echoing a key theme from last year, we also continue to believe that emerging managers offer structural advantages over their larger peers, which we believe are likely to be reflected in their results over the long run." – Eric Weinstein, Chief Investment Officer, Fund of Hedge Funds Team
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