As we reported last November in Best 5 Investment Picks for 2012, the smart money was positioning portfolios for growth, based on strategists' confidence that cash-rich U.S. companies were well disposed toward dividends and that another recession was far from likely.
That was then. Considering the global markets' second-quarter plunge on eurozone worries—not to mention the fiscal cliff that the U.S. faces as the presidential election nears—investors now understandably wonder if their money is still safe.
In a market call on Tuesday, OppenheimerFunds Chief Investment Officer Art Steinmetz acknowledged that eurozone woes and the fiscal cliff are tremendously difficult to handicap. "It seems that we are in thrall to the caprices of politicians more than in the past," he said.
Asked if it was worthwhile to wait to buy stocks until after the election, however, Steinmetz was adamant. "I would not let the elections stop me from getting my portfolio right today," he said.
Recession remains unlikely, noted his colleague, Chief Economist Jerry Webman: "We think the most probable case is a little more Europe, a little more crisis, a little more central bank action, and we'll keep bouncing along. The problem is that all of this creates uncertainty, and the markets hate uncertainty."
Overall, Steinmetz said, mutual fund flows in the last six years have shown a net drain in U.S. equity funds, with a slight flow to emerging markets and a huge flow to fixed income. Indeed, he said investors' overwhelming faith in the bond market as a safe haven is starting to look a lot like the dot-com bubble of the late 1990s.
So what's an investor to do? Read on for AdvisorOne's midyear update on the best investment picks for 2012.
1) Stocks
Despite talk that dividend-paying stocks may be the next bubble because valuations are overstretched, equities continue to be a good bet, asserted OppenheimerFunds Chief Investment Officer Art Steinmetz during the Tuesday market call.
"If you look at the total return in bonds, you can't go down below zero," Steinmetz said. "The possibility of a loss is greater than ever because yields are lower than they've ever been. On the other hand, stocks have gotten cheaper and cheaper relative to bonds."
(Remember, investors, that the markets of 2012 are tightly correlated due to macroeconomic events, which means that many people are overlooking companies' fundamentals. Those are ideal conditions for stock pickers.)
"Over the next seven years, stocks will outperform bonds, and investors are positioned exactly the wrong way," said Steinmetz, who likes the finance, health care, tech and retail sectors. And, he added, beware materials and energy.
Taking a contrarian stance, Steinmetz also gave European stocks a mention, saying they look attractively cheap these days. "No one's saying we have a bullish outlook on the European economy," he said, "but don't forget that many European companies have a global customer base that doesn't depend on the European consumer. That represents an opportunity, in Oppenheimer's view. Don't look at countries, look at companies."
The German technology conglomerate Siemens, for example, saw its most successful year in its history in 2011, but the stock reached a 52-week low of $82.23 earlier in July, off 42.8% from its $138.23 high. NASDAQ's July 8 "GuruFocus" list of 52-week lows notes that some stock pickers have used this as an opportunity to buy Siemens.
2) Bonds
The U.S. Treasury on Wednesday auctioned its benchmark 10-year notes at a yield of 1.459%—a record low, confirming most analysts' belief that the best way for investors to go in the fixed-income market is toward higher-yielding bonds with good underlying fundamentals.
A day earlier, the LPL Financial market strategist Anthony Valeri warned in a fixed-income call note that the auction might test demand as investor fatigue with lower yields sets in.
But on the positive side, Valeri wrote, "A lack of new issuance, strong reinvestment needs, attractive valuations and above-average income continue to support high-yield bonds despite equity volatility. The average yield spread of high-yield bonds is currently 6.5% above comparable Treasuries."
Whether it's sovereign debt, investment-grade corporate, high-yield junk or tax-free municipals, the key to buying bonds in 2012 is duration risk, which also stands at record-high levels, according toSteinmetz, Oppenheimer's CIO.
Money is pouring into fixed income, especially governments, including municipal bonds with long durations, Steinmetz said. "People like them for the tax exemption, but they should look at shorter-term muni bond funds. People don't understand the risks they're getting into."
Mirroring Valeri, Steinmetz pointed to the virtues of high yield: "We think it's an excellent time to clip the coupons on high-yield corporates and leveraged loans," he said.
3) Funds
Looking for a solid exchange-traded fund to invest in? The S&P Capital IQ ETF analyst Todd Rosenbluth makes no bones about what he believes is a top pick: the iShares S&P 100 Index Fund (OEF), which offers a basket of dividend-yielding stocks and a low expense ratio of 0.2%. Apple is the fund's largest holding.
"These are the 100 largest stocks within the S&P 500 Index," Rosenbluth told AdvisorOne on Wednesday. "These are the heavyweights. The index and the fund have outperformed the broader S&P 500 Index year to date because investors are gravitating more to the safety of the largest of the large caps."
4) Alternatives
5) REITs
