Merrill Lynch Wealth Management is buying European equities driven by a positive outlook for the asset class in 2013 and the most attractive valuations relative to investment-grade credit in 25 years.
The money manager, which oversees about $1.8 trillion globally, turned overweight on the region’s stock markets last month for the first time in two years, meaning they now own more of the assets than are represented in benchmark indexes. The wealth-management unit will add to its holdings of European and emerging-market stocks over the next six months.
“Our conviction is to add to our equity exposure,” said Bill O’Neill, chief investment officer for the firm’s Europe, Middle East and Africa business at a press briefing in London. “We think it will be a good year for equities in 2013. We should see the areas of relatively cheap market risk like Europe and the emerging markets being the key performers.”
O’Neill predicted equities will beat fixed-income investments next year, marking the start of a “great rotation” out of bonds, as investors refocus on the outlook for economic growth rather than U.S. and euro-area politics.
“This leads us to favor equities over bonds,” said O’Neill. “Assuming no big shock from the fixed-income markets - - in other words if U.S. Treasuries remain at around 2 percent - - you should be in a position to see a total return for equities in the high-single digits.”
Even so, the firm will remain neutral on global equities until U.S. politicians reach a deal to avoid the so-called fiscal cliff and evidence mounts that the recovery in the world’s largest economy will continue into the first quarter.
“All we need is momentum,” said O’Neill from Merrill Lynch’s London offices. “We are moving from red to amber. It will go green. The key thing is a sense of sustained economic momentum which brings with it profit growth.”
The so-called earnings yield for the Standard & Poor’s 500 Index, or the percentage of share prices investors get back in profit, stands at 7.1 percent. That is almost 5 percentage points more than the yield from global corporate bonds of all ratings, the highest spread in more than a decade, according to data from Bloomberg and Barclays Plc.