As we welcome the new year, it is perfect time to take a fresh look at our portfolios, and consider the strategies that may work in 2013.
Despite significant challenges, stocks managed to perform well in 2012, with the S&P 500 index returning more than 13% during the year. (Read: 3 ETFs for the January Effect)
The good news is that the congress finally arrived at a compromise to avoid most of impending tax increases and postpone spending cuts. While there are still a large number of unresolved issues, the market may get a short-term lift from the deal.
Looking at the longer-term, it may be another year of muddle-through growth for the US economy, while most of Euro-zone may remain in a recession. I do not see many bright spots in the rest of the developed world and expect the gap between the performance of the developed and the developing countries to widen in 2013.
While there is no way to accurately predict the performance of the markets, there are certain mid-to-long term investing strategies that will likely succeed in 2013 and beyond.
Dividend ETFs will be back in focus
Dividend stocks and ETFs lagged the broader market last year, primarily due to concerns relating to potential tax hike this year. Now with a favorable agreement in place regarding tax rates on dividends, the demand for dividend-paying stocks and ETFs will go up again.
Dividend taxes for top-bracket taxpayers will rise from 15% to 20% (plus an additional 3.8% surcharge for Obamacare, to a total of 23.8%)—much less than 39.6%, if there was no deal. Dividend taxes for those in the lower tax brackets would remain at the current levels.
Even before the agreement, I maintained that the sell-off in high-quality dividend stocks and ETFs in anticipation of the tax increase was unreasonable. Most dividend paying companies are large, mature companies with solid cash-flows that are likely to perform better than the broader market in the longer term.
Further, dividend stocks and ETFs are excellent options for investors searching for yields in the current environment of rock-bottom interest rates. At the same time these investments also provide greater stability and safety in volatile environment. (Read: 3 Excellent Dividend ETFs for Safety and Income)
My top pick among the dividend ETFs is Vanguard Dividend Appreciation ETF (VIG). VIG follows the Dividend Achievers Select Index, which is composed of common stocks of high quality companies that have a record of increasing dividends for at least 10 years. It is Zacks rank 1-‘Strong Buy’ ETF.
Emerging Market Sovereign Debt ETFs may stay hot
The case of investing in emerging markets' sovereign debt seems to be pretty strong now. Many emerging countries now have better fiscal health and lower debt levels than their developed counterparts. Further these countries are growing at much higher rates compared to the developed world and also have low correlations with developed economies.
While interest rates are at rock-bottom levels in the U.S., the emerging countries’ central banks still have the flexibility to cut rates further, providing great chances for capital appreciation. (Read: Emerging Markets Sovereign Bond ETFs-Safe with Attractive Yields)
For investors who do not want short-term currency related fluctuations in their portfolio, US dollar denominated bond ETFs like J.P. Morgan USD Emerging Markets Bond Fund (EMB) and PowerShares Emerging Markets Sovereign Debt Portfolio (PCY) are the best options.
However, investors looking for true diversification in their portfolios and higher longer-term return should consider investing in emerging markets local currency bond ETFs.
Housing will be one of the brightest spots in U.S. economy
Recent housing data suggests that housing market has finally bottomed out. Fed’s low interest rate policy and massive purchases of mortgage backed bonds will further support the housing recovery in 2013. (Read: Best Construction ETF to ride the housing upswing)
As a result of improving sentiment, home construction companies and the homebuilder ETFs have been on the run in the past few weeks. In fact, the iShares Dow Jones US Home Construction ETF (ITB) was the best unleveraged ETF performers in the entire market last year, with more than 79% return.
ITB has been Zacks rank 1-‘Strong Buy’ ETF for quite some time. ITB still appears to be the most suitable ETF for investors seeking to profit from housing upswing, as it is heavily focused on homebuilders. We expect homebuilders to benefit the most from the early stages of housing recovery whereas the other related sectors will benefit more if the recovery gains momentum and the consumers have significant disposable incomes. .
On the other hand, SPDR S&P Homebuilders ETF (XHB) has substantial exposure to home-furnishing, home improvement companies and appliance makers, This ETF has underperformed ITB so far in terms of performance, but may benefit later this year if the housing market gains momentum.
Another industry that looks very attractive right now is the timber industry. Any pickup in the housing construction and remodeling activities will result in increased demand for wood. Investors may consider Guggenheim Timber ETF (CUT) or iShares S&P Global Timber & Forestry Index Fund (WOOD) for exposure to this sector.
Some smaller emerging economies may outperform the BRICs
We expect better performance from the emerging markets’ stocks this year. China may grow at ~8% next year as the domestic consumption and investment picks up due to recent policy measures.
India’s pace of growth this year was slowest in about a decade mainly due to rising inflation, widening fiscal and current account deficit and a weakening currency but some of the recent policy measures taken by the Indian government have revived the investor optimism for the country. (Read: Buy these Asia ETFs to beat China, India)
However some of the smaller emerging economies may outperform in 2013 due to their strong growth resulting from robust domestic consumption, political stability and favorable investment climate
In Latin America, I expect Mexico and Colombia to outperform their regional peers. Among South-east Asian countries, I am very hopeful for long-term prospects of Philippines and Indonesia.
iShares MSCI Mexico Investable Market Index ETF (EWW) has a Zacks ETF Rank of 1-'Strong Buy'.
iShares MSCI Philippines Investable Market Index ETF (EPHE) has a Zacks ETF Rank of 1-'Strong Buy'.
The investors have a choice of two Indonesia specific ETFs: Market Vectors Indonesia Index ETF (IDX) and iShares MSCI Indonesia Investable Market Index Fund (EIDO). IDX has a Zacks ETF rank of 1-'Strong Buy' and EIDO has Zacks ETF Rank of 2-'Buy'.
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