Morgan Stanley's North American equity research team, lead by Adam Parker, has revealed its big prediction for the US stock market in 2013.
For 2012, Parker was one of the most bearish analysts on the street, a call that he admits has stung badly.
For 2013 the call is very tame:
Our year-end 2013 S&P500 price target is 1434, and our bull and bear targets are 1733 and 1135 . Our EPS outlook for 2014 is $110.21, up from our 2013 forecast of $98.71, both well below consensus. Improving Michigan Confidence and tightening corporate spreads drive the relative improvement in our earnings outlook.
Not that right now the S&P is at 1409, so he's anticipating just 25 points between now and all of next year.
Outside of the big index target, Parker sees three big investment ideas: High-quality mega-cap stocks, dividends, and.... China exposure! This last point really speaks to the way there's been a big sentiment shift on China over the final few months of the year. Whereas halfway through 2012 China was seen as finally going into a hard landing, now US equity strategists are once again recommending their clients buy into it.
Besides the fact that China is seeing "green shoots" these days, Parker has other reasons for liking the Chinese-exposed basket (which includes names like FedEx, Cummins, Apache, GM, and Johnson & Johnson).
For one thing, they've been lagging US-centric stocks all year.
As such, they've gotten quite cheap (relatively).
As for another theme, dividends, Parker notes that for the first time ever, S&P earnings yield is now above that of the high-yield bond market, meaning that investors eager for income will have to rotate more into dividend stocks.
He also notes that corporate America has a huge cash pile, which alongside very low dividend payout levels presents an opportunity for dividend growth.
Anyway, it's great that 2013 outlooks are rolling in.
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