A Look Back At Q1 Calls

Russ KoesterichRuss Koesterich: This past Sunday wasn’t just Easter, it also marked the end of the first quarter. In between hunting for eggs and family meals, I took some time over the long weekend to reflect on how the economy and markets have performed so far in 2013 vs. what I expected late last year.

My Economic Calls

  • The US Economy: While inflation and interest rates remain low, as I expected, I definitely underappreciated the resilience of the US economy. I won’t know how fast the economy grew in the first quarter for another month, but it likely grew faster than I expected. One reason: Despite a significant tax hike, consumption has held up better than expected thanks to an improving labor market and a continued resurgence in home prices.
  • Outside the United States: As anticipated, Europe continues to struggle and Chinese growth has modestly improved. While Chinese growth numbers have been erratic, they still suggest that the economy will deliver on China’s 7.5% to 8% growth target.

My Investment Calls

  • Equities: Late last fall, I expected that equities would beat bonds and within equities, I had a preference for mega-caps, certain countries in Northern Europe and select emerging markets. So far in 2013, mega and large caps have narrowly underperformed small caps, which have benefited from strong flows. Europe has played out mostly to script, with Northern Europe beating Spain and Italy. And my big miss for the quarter: My preference for select emerging markets including China and Brazil. While the Chinese economy has accelerated, investors remain nervous about the financial system, and Brazilian growth continues to disappoint.
  • Bonds: My fixed income positioning—a long-term underweight to duration and an overweight to credit—was generally in the right direction. While the backup in interest rates has been modest year to date, credit products, like high yield, have still outperformed Treasuries.

My Updated Outlook for 2013

So what do I expect going forward in 2013 as we enter the second quarter? I’ll write more on that in the weeks ahead but in the meantime, here’s a preview of my updated outlook:

  • I still believe that US growth will slow a bit in the second quarter, but the US economy seems to be growing fast enough to absorb the hit from The Sequester.
  • While I don’t expect the pace of equity gains to continue, global stocks still look inexpensive relative to fixed income alternatives so I remain overweight equities. That said I still expect more market volatility this quarter.
  • For longer-term investors, I continue to have a bias toward larger companies, as they still appear cheaper and more profitable than their smaller counterparts. Also, if the Federal Reserve does start to pull back on its asset purchase program earlier than expected, small caps are likely to suffer more than mega and large caps. The larger firms are accessible through the iShares S&P 100 Index Fund (NYSEARCA:OEF) and the iShares S&P Global 100 Index Fund (NYSEARCA:IOO).
  • I’m maintaining my fixed income positioning, although I would be a bit cautious on adding aggressively to high yield and would instead look to bank loans, which should also help insulate a portfolio in the event rates continue to rise.

The author is long IOO

Russ Koesterich, CFA, is the iShares Global Chief Investment Strategist and a regular contributor to the iShares Blog.  You can find more of his posts here.

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