CHICAGO, December 4, 2012 –Mesirow Financial’s business leaders identified potential rewards and risks in 2013 at its ninth annual Investment Outlook event. The event, moderated by Chairman and CEO Richard Price and titled "A World of Opportunity," was held at the Sheraton Chicago Hotel and Towers and attended by nearly 500 clients and colleagues.
The perspectives provided by eight of the firm's business leaders in key markets provided insight for finding opportunities in a global economic stage:
U.S. Economy (presented by Diane Swonk, chief economist, Mesirow Financial)
"We are at a proverbial fork in the road; we can either chose to control our fiscal future and preserve our lead in the world, or squander what is left of our legacy as a functioning democracy and market economy. The threat to our credit rating is particularly disturbing, as further downgrades could undermine the dollar's status as the world's reserve currency.
Our current forecast assumes about $200 billion in fiscal drag, rather than the $607 billion attached to the fiscal cliff. If we overcome the near-term risk associated with fiscal policy, the year ahead could be a transitional period: the housing market is finally coming back; cuts to state and local government spending are abating; and, business investment should pick up if certainty can be restored on the fiscal front. Add to that, persistently easy monetary policy, which makes it easier for both businesses and households to gain credit or dip into cash reserves via wealth effects, and the perverse stimulus created by the repairs and rebuilding associated with Superstorm Sandy, and growth in 2013 should accelerate.
Consumer spending should pick up in response to a moderate rise in employment, a rebound in housing prices (and household wealth) and the new demand created by Sandy. Oil and agricultural prices are expected to come down after spiking in 2012. The slack in labor markets is expected to remain substantial, despite a moderate pickup in employment.
The trade deficit is expected to narrow as exports rebound after slowing fairly dramatically in 2012 and the drag from Europe is expected to dissipate. Expansion in the Federal Reserve's balance sheet will continue to put upward pressure on the supply of money and asset prices; the velocity of those dollars into the rest of the economy via credit markets, however, is expected to remain constrained. Europe is expected to continue to move forward, in fits and starts, with efforts to save the euro. This will help alleviate the flight to safety and downward pressure on U.S. Treasury yields from abroad."
International Economy (presented by Adolfo Laurenti, deputy chief economist, Mesirow Financial)
"As the United States negotiates a path away from the fiscal cliff, the rest of the world will probably remain on hold, waiting for a cue about growth opportunities in 2013. In the case of Europe, we do not anticipate much of an improvement – although, a stabilization in the perverse dynamics of the sovereign debt crisis would, in itself, constitute an improvement. Disappointing economic performance will delay progress on fiscal consolidation, but it will bring the Eurozone countries even closer together. Despite a cacophony of constant quarreling, we expect to see progress on new budgetary rules and a European banking authority nonetheless.
China is also facing difficult adjustments, both politically and economically. We anticipate that Chinese GDP will improve only modestly from its 2012 growth rate. Political caution by the new political leadership will prevent bold steps in any direction. Caught in the crossfire of China's transition, demographic realities and growing fiscal headwinds will cause Japan to once again disappoint forecasters.
Latin America is a mixed bag but we are optimistic about a rebound in the Brazilian economy, as well as additional progress in Chile. Those countries with broader diversification of economic activities, reliable governance, market-friendly policies and well-rooted rule of law will succeed in navigating the troubled waters ahead: think of Canada, Australia and New Zealand.
The Middle East will remain a source of trouble and concern. The probability of U.S. military action against Iran is dropping further, but the Syrian conflict might spill over to neighbors Lebanon and Jordan. Turkey, now in a race with Iran over the role of regional power, will test the patience of markets, which can hardly reconcile strong economic performance with growing military involvement in intractable, regional conflicts."
U.S. Value Equity (presented by Susan Schmidt, managing director, U.S. Value Equity)
"Although the fiscal cliff looms large, we have bullish long-term outlook for U.S. equities, based on improvements in key economic sectors, cheap valuations – despite generational low interest rates – and an accommodative Fed ready to inject liquidity."
Fixed Income (presented by Steven Luetger, senior managing director, Fixed Income)
"We expect slightly higher Treasury rates and modestly wider spreads on mortgage-backed securities, corporate bonds and commercial mortgage-backed securities. Still, for yield, we favor high-quality and high-yield corporate bonds over Treasuries. Taxable municipals have recently underperformed corporate bonds and now look to be the cheapest sector."
Private Equity (presented by Daniel Howell, senior managing director, Private Equity)
"Fundraising totals increased modestly in 2012, although outcomes have been bifurcated, with elite private equity managers moving quickly through the market while others languish. On the investment side, the robust U.S. leveraged lending market has bolstered buyout activity while the U.S. venture capital market is running at a healthy and, as we see it, sustainable pace. We expect these trends to continue through 2013, benefiting a diversified portfolio of leading private equity funds."
Hedge Funds (presented by Thomas Macina, senior managing director, Advanced Strategies)
"Many portfolios of hedge funds were able to generate reasonably attractive returns in 2012, in what proved to be a more benign environment than many expected. We believe many opportunities still exist to seek compelling, risk-adjusted returns in 2013 – in non-agency RMBS and value equities in particular. We also continue to see value in maintaining higher levels of cash."
Currency and Commodities (presented by Gary Klopfenstein, senior managing director, Currency and Commodities)
"As the fate of the euro was being determined in 2012, we saw a shift in market dynamics. We believe in 2013 there will be a revaluation of exchange rates to properly reflect the new economic reality, which should present new opportunities in the currency market. On the commodities front, we expect that the same themes from 2012 (the perception of financial risk, the global economic slowdown and the draught) will continue to drive the markets for the foreseeable future."
International and National Real Estate (presented by Joshua Daitch, senior managing director, Institutional Real Estate, Multi-Manager)
"2012 marked the third straight year of recovery for real estate, led by tier-1 properties and markets. In 2013, we expect investors to start taking profits from core real estate and reallocating capital to higher yielding non-core strategies. We believe that global deleveraging is creating tremendous opportunities, but remain dubious about underwriting growth and believe in focusing on deep value opportunities. Tactical capital deployment is critical, and continue to believe that today the best offense is still a good defense."
You may also view a pdf containing the complete narratives for all of Mesirow Financial's businesses.
Mesirow Financial is a diversified financial services firm headquartered in Chicago. Celebrating its 75th anniversary this year, the firm remains independent and primarily employee-owned with approximately 1,200 employees globally. The firm is well capitalized and has been consistently profitable, with capital of $352 million, revenues totaling $491 million for fiscal 2012 and $65.4 billion in assets under management, of which $38.6 billion are in currency and commodities as of September 30, 2012. With expertise in investment management, global markets, insurance services and consulting, Mesirow Financial strives to meet the financial needs of institutions, public sector entities, corporations and individuals. For more information about Mesirow Financial, visit mesirowfinancial.com.
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