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Equity Markets Still Look Attractive in 2013: UBS’s Zirin

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Hope springs eternal among most stock strategists and Jeremy Zirin, chief equity strategist at UBS Wealth Management, is no exception. Zirin expects moderate gains in stocks this year and says the market will "continue to grind higher as the economy starts to improve."

There are increasing signs that the economy is improving. The four-week moving average for initial unemployment claims has fallen to its lowest level since March 2008 and the housing market continues to gain momentum. Home prices and new home sales recently posted their biggest gains in 2.5 years and builder confidence has risen to its highest level in more than 6.5 years.

Zirin forecasts GDP growth of 2% to 2.5% this year. Growth will accelerate as Washington adopts new fiscal policies, says Zirin.

“The consumer, which is 70% of the U.S. economy, has been very resilient in the face of policy uncertainty but business investment has lagged,” Zirin notes.

Zirin forecasts a 1,540 rolling 12-month target for the S&P 500 in 2013 based on “fairly robust” earnings growth and relatively low equity valuations. Stocks are relatively cheap with the S&P 500 trading at 12.7x forward earnings versus the long-term average of 14.5, says Zirin.

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“For investors looking to preserve purchasing power down the road, equity markets….still look very attractive,” says Zirin. “The spread between the earnings yield of equities -- the inverse of the price earnings multiple, of around 6%-7%--and the very low or negative real yield of fixed income securities is at the widest it’s been in two decades.”

Zirin favors dividend growth stocks which he says carry less overall market risk, generate income and have more potential for dividend growth than current high-yielding dividend stocks. More specifically he favors dividend growth stocks in consumer staples, industrials, health care and technology.

“Lots of established mature tech stocks have tremendously strong balance sheets with tons of cash,” he says.

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Some of that cash, however, remains overseas because of current tax policies. If those policies change to allow repatriation of that cash at lower tax rates that “could lead to a pretty strong boom in repurchases and dividend increases from the tech sector,” says Zirin.

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