For many investors, a decidedly shortsighted mentality continues to limit horizons and opportunities and is consigning them to an "island of fear." While we recognize current concerns and uncertainties, we also see the positive near-term trends and solid longer-term investment outlook, and would position portfolios to take advantage of them.
There are certainly many reasons for current investor fear —the ongoing sovereign saga in Europe, the fiscal cliff worries in the U.S., worldwide political leadership changes, slower growth in emerging markets, geopolitical volatility, pension concerns, and an overindebted public sector, to name just a few.
We don't need another research report, news headline, or think-tank study to reinforce what we have all experienced in the past five years and must be ready for in the future. The bottom line is that the public sector has a great deal of restructuring to do, the economic and employment growth curves are going to be slower than "normal," central banks will have to remain easy, access to capital will be more restrictive than we have been used to, and the direction of global policy should remain erratic. Tough decisions will have to be made, and leadership will be needed to work through it all. We know this, and therefore the investment landscape remains fragile.
But these pervasive uncertainties and investor fears are overshadowing profits and solid long-term private-sector trends. In the U.S., with housing starting to recover, gasoline prices down, and mortgage rates at record lows, the stage is set for a possible better growth picture. At the same time, Europe is making slow but more substantive moves toward addressing its problems, and China has reversed course and started to ease.
Still, widespread pessimism could very well dominate the markets through the rest of the year, and any further slippage in the global growth outlook would put additional pressure on the markets. At that time, we would look to take advantage of better prices in investments that should benefit from the ongoing global rebalancing and related themes.
For now, we remain neutral on equities overall. That said, we still favor solid cash flow investments and select growth ideas in equities; believe that deploying a crossover strategy in fixed income can increase after-tax yield; expect housing-related investments to go through a sustainable uptrend; and expect long-duration real assets such as timber and farmland to attract foreign investment flows.
In the coming months we will look for opportunities to increase our weights in equities, given our positive long-term expectations.