Top 10 investment ideas for 2013

Members of the Morgan Stanley Global Investment Committee (GIC) believe the “highly accommodative policy stance being pursued by the Federal Reserve, the European Central Bank (ECB) and other central banks should continue to bolster financial markets in 2013 despite fiscal policy drag and another year of subpar growth in the global economy.” In short, committee members feel the current environment leads to a good outlook for equities and other risk assets in 2013.

According to a January 2013 Global Investment Committee report, here is a list of Morgan Stanley’s 10 top investment ideas to consider this year:

COMMODITIES AND GOLD. Growth in emerging market economies seems likely to acceler¬ate in response to recent policy-easing steps. Economic activity in emerging market economies tends to be more resource intensive than in developed economies, so a pickup in emerging markets growth bodes well for commodity demand.

With regard to gold, the accommodative policy stance of the world’s major central banks seems likely to continue to fuel concerns about future inflation and currency debasement. This, in turn, should spur investment demand for gold.

EMERGING MARKET BONDS. Emerging market bonds are one of the more attractive bond sectors. This asset class has undergone a rerating during the past several years because of improvement in the underlying credit quality of the sovereign issuers. We encourage investors to seek vehicles that provide exposure to local-currency-denominated bonds (unhedged), as we expect currency appreciation to provide a boost to to¬tal return.

DIVIDEND ARISTOCRATS. With money-market interest rates and traditional safe-haven bond yields likely to remain near record lows, dividend-paying equities should continue to provide an attractive alternative for income-seeking investors. We prefer large-cap, blue-chip companies that have consistently raised dividend payouts for several years.

INVESTMENT GRADE CREDIT. The persistence of low interest rates and rising stock values has further strengthened corporate balance sheets. Thus, investment grade corporate bonds continue to offer an attractive combination of yields that are higher than those on traditional safe havens, such as US Treasuries, and high credit quality.

HIGH-QUALITY MUNICIPAL BONDS. The return of the 39.6 percent US income tax rate should underpin demand for tax-exempt municipal bonds. In light of the outlook for subpar economic growth, which will continue to strain state and local government finances, we favor “high quality” (rated A or better) general-obligation and essential-service revenue bonds rated BBB or better with maturities of five to 11 years.

MASTER LIMITED PARTNERSHIPS. Master limited partnerships—limited partnerships that trade on a securities exchange—offer the tax benefits of the limited-partnership structure and the liquidity of publicly traded securities. MLPs are concentrated in natural-resource industries such as oil, natural gas and minerals extraction. They are attractive to income-seeking investors, as they typically offer dividend yields that are considerably above those on conventional equity investments.

EMERGING MARKET EQUITIES. Emerging market (EM) economies are on much better footing than their developed-market counterparts, due to growing middle-class consumer sectors that support domestic demand. Many EM countries do not face the debt overhangs that are limiting policy flexibility in many devel¬oped countries. Looking forward, growth in emerging market economies seems likely to accelerate in lagged response to the policy-easing steps taken during the past several months.

GLOBAL GORILLAS. We believe that investing in large, domestic market (DM) companies with outsized exposure to the emerging markets—we call them “global gorillas”— is another way to capture the growth from economies that expect to account for about 80 percent of global growth this year. One way to capitalize on that growth is via established multinationals that have strong businesses in countries with a rapidly expanding middle class—such as China, India and Brazil, all of which are likely to experience rapid growth in consumer spending in the next several years.

US LARGE-CAP GROWTH STOCKS. This idea incorporates our preferences within US equities in terms of market capitalization and style. As with the global gorillas, large-cap stocks are better-positioned to benefit from established sales channels in emerging markets. Moreover, from a valuation perspective, large-cap stocks appear historically cheap relative to mid-and small-cap stocks. Similarly, by historical standards, growth stocks appear cheap relative to value stocks.

WATER. Water may be the most im¬portant commodity story of the 21st century as declining supply and rising demand combine to create the “perfect storm.” Current global water-usage levels are unsustainable. While the scarcity of freshwater is most acute in Africa and western Asia, scarcity also has become an economic constraint in major economies such as China, India and Indonesia, as well as in the commercial centers of Australia and the western US. In the face of progressively growing demand for water, companies are investing in ways to increase water availability.

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