S&P 500 to hit 1600 this year: Bank of America strategists
The S&P 500 is expected to hit “new all-time highs” while regional stock indices are seen gaining between 10-15% this year
The Bank of America Merrill Lynch asset allocation for this year recommends equities over bonds as strategists believe 2013 will be a year of transition and the recent leadership of fixed income and scarce growth, and old leadership of commodities, will give way to the new leadership of equities and value stocks.
Over the past seven years, investors have poured $800 billion into bond funds and redeemed $600 billion from long-only equity funds, but recent data show the first genuine signs of equity-belief in years, the strategists wrote in a market note.
Hello equities, goodbye bonds! Hello exit strategies, goodbye QE! Hello inflation, goodbye deflation! The Great Rotation has begun and the big picture is transitioning from deflation and deleveraging to a normalization of growth, rates and risk appetite, they wrote.
"We expect the S&P 500 to reach new all-time highs and for regional indices to gain between 10-15% over the year."
The S&P 500 rose 5.2% since the beginning of the year to around 1500. It gained over 13% over the past year.
For other indices, the strategists at Bank of America Merrill Lynch forecast appreciation of between 10% and 15%.
The European Stoxx 600 index is seen hitting 315 this year. It gained 3.4% year-to-date and 13.4% over the past year, to 289.
The leading blue-chip index for the eurozone, Euro Stoxx 50, will likely reach 3000 this year, according to the strategists. It gained 3.8% to 2736 year to date and rose by 13% over the past year.
Britains FTSE is seen hitting 6400 this year and Germanys DAX 8400, the Bank of America Merrill Lynch analysis shows.
The strategists are overweight Japanese equities and said they would use pullbacks to add to positions.
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To top it off, the demographics have deteriorated to such an extent that Japan has become the first country where sales of adult diapers now exceed those of baby diapers, the strategists said.
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They noted that retail inflows into stock markets have started to pick up and individual investors were still lightly positioned in equities relative to history.
A boom in leveraged buy-outs would be another reason for a revival of stock markets, as the environment is ripe for a pick-up in deal flow because debt costs are low and the cost of capital for buyout firms is at one of the cheapest levels in history, while banks, which have repaired their balance sheets, are once again in a position to offer financing for deals.
In the S&P 500, the returns will be concentrated in the second half of next year and investors should look for value in cyclical sectors, the strategists said.
They are bullish on Europe, but see some scope for near-term consolidation; cyclicals and financials are favorites.
The Bank of America Merrill Lynch strategists are bearish on the Pacific Rim, recommending that investors take profits on long positions; they still prefer Singapore, Hong Kong and Australian banks but investors should look for pullback before adding to long positions there.
They are bullish on emerging markets equities, recommending that investors buy Turkish stocks versus Central and Eastern European stocks; they also recommend buying the shares of Latin American infrastructure and consumer-related companies.
Although generally bearish on debt, the strategists are still bullish on emerging markets debt, where they prefer investment grade corporate debt to sovereign debt. Geographically, they prefer Indonesia, Russia, Brazil and Mexico in external debt and, in local debt, Russia and Indonesia.
Unlike other analysts who have warned that this could be the year when the gold bubble bursts, the Bank of America Merrill Lynch strategists are bullish on gold, with a target of $2000 over six months.