What the Market Gurus See for 2013

What will the year ahead bring? The world of investing has no shortage of seers willing to hazard an educated guess. We gathered the top ten predictions for the year ahead from two market pundits, plus Morgan Stanley's Global Investment Committee.

Bob Doll: The economy muddles through, and stocks grind higher

This year will be a good year for stocks, but it may not feel like a good year, says Bob Doll, chief equity strategist for Nuveen Asset Management. "We will not see a recession," Doll says. "On the other hand, we are not going to see acceleration." Doll expects U.S. stocks to hit a record high in 2013. Standard & Poor's 500-stock index hit its all-time high of 1565 in October 2007. Returning to that level would require a 7% jump from the index's current value of 1461 (all current prices are as of the January 9 close).

But the economy will continue its weak trudge. Doll predicts that 2013 will be the fifth year of sluggish growth for the U.S. He's calling for nominal growth in gross domestic product -- meaning real GDP growth plus the rate of inflation -- of less than 5%. "I don't think this is necessarily a breakout year," Doll says, in part because U.S. business leaders still lack confidence and aren't making large investments.

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He thinks U.S. manufacturing will be a bright spot and will grow at a faster pace than the overall economy in 2013. That will be driven in part by cheap natural gas, Doll says. He notes that gas was recently priced at $3 per million British thermal units (MMBtu) in the U.S., compared with $10 per MMBtu in Germany and $13 per MMBtu in Japan. He says rising wages in emerging nations are aiding the relative competitiveness of U.S. manufacturers as well.

As for specific investment recommendations, Doll believes shares of large U.S. companies will beat those of small companies because small-company stocks tend to surge ahead when economic growth is accelerating and large-company stocks tend to shine when growth slows (which he believes will happen in 2013). He thinks companies that sell goods to emerging-markets nations will be a strong spot this year compared with businesses that sell only or primarily within the U.S., and he thinks shares of companies domiciled in emerging-markets nations will beat developed-markets shares. Although Doll says Europe will continue to heal gradually -- with an improving economy in 2013 and an end to its recession in 2014 -- it's too soon to back up the truck for European stocks.

Dividends will be another bright spot. Doll says dividend payouts will increase by 10% or more in the U.S., as corporations decide to distribute a greater portion of their earnings. Doll says that about 50% of S&P 500 stocks currently yield more than the 1.9% yield of ten-year Treasury bonds. Over the long term, that figure has been closer to 10% of companies, he says. The outlook for bonds, however, is not so rosy, as Doll predicts that long-term interest rates will rise in the year ahead.

Finally, Doll sees lawmakers reaching a deal to cut U.S. government debt by $2 trillion to $3 trillion over the next ten years.

Doll issues a list of ten predictions at the start of every new year. He says he's historically had about a 70% to 75% accuracy rate with his predictions. For 2012, he was correct in predicting that the European debt crisis would ease and that U.S. stocks would rise by 10% or more. He was wrong, however, in forecasting that Republicans would take control of the Senate and the White House in the 2012 elections. (You can read the full list of his 2013 predictions here).

Byron Wien: A weak year for U.S. stocks, while Asian shares surge

Like Doll, Wien is known for his annual list of predictions. But Wien chooses to focus on what he thinks will be the top surprises of the year. He defines a surprise as an event that the average investor believes is relatively unlikely but that he believes has a more than 50% chance of happening.

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Wien, the vice-chairman of Blackstone Advisory Partners, a unit of private-equity firm Blackstone Group, thinks this year will be tough on U.S. corporations. He believes sluggish sales will lead to earnings disappointments and that the S&P 500 will dip below 1300 during the year (that would mark an 11% dip from the January 9 close and put the market officially into correction territory). He says financial stocks, which had a strong 2012, will be particularly weak in the coming year, in part because of heightened regulation and persistent lawsuits against banks and financial-services firms. And he projects that European stocks will decline by about 10% in sympathy with U.S. stocks, even as European nations begin to adjust to austerity.

But Wien sees sunnier days to the East. He predicts that new leadership in China could make real headway in tackling corruption and creating a stronger social safety net for its citizens. And he sees markets reacting favorably, with a 20% gain for the Shanghai Composite index. Wien also believes Japanese stocks have room to run. He says continued weakness in the yen will help to drive Japanese exports, and he sees the Nikkei 225 topping 12,000 during the year, for a gain of 13% from its latest close of 10,579. (It will be some time before the Nikkei returns to its record high of 38,957, set in 1989.)

Wien also projects that the price of gold will soar to $1,900 per ounce during the year, a gain of 15% from its current price of $1,658 an ounce. And climate change, he says, will drive further crop failures this year, pushing up the prices of corn, wheat and cattle.

In addition to those financial predictions, Wien has some predictions to offer on general global issues. He believes that Iran will produce a nuclear weapon in 2013, and that the U.S. and Israel will have to change their strategies in addressing the threat from Iran. Wien thinks Democrats will prompt a charge for U.S. independence from Middle East oil by 2020, which will lead to more land being opened up for hydraulic fracking and more drilling on federally owned land. Finally, he believes that U.S. Republicans, after badly lagging among Hispanic voters in 2012, will push for immigration reform in 2013, by sponsoring a bill that paves the way for citizenship for illegal immigrants in some circumstances. (You can read Wien's full predictions here).

Morgan Stanley: Emerging markets are the way to go

The investors on Morgan Stanley's Global Investment Committee believe that efforts by central banks to stimulate their economies will continue to give markets worldwide a lift in 2013. Loose-money policies will be a boon for riskier investments in particular.

Their top ten investment ideas for this year include three tied to developing markets. Emerging-markets stocks, they say, should benefit from stronger economies in developing countries, plus continuing declines in national debt loads. Emerging-markets government bonds denominated in local currencies, as opposed to those denominated in dollars, have been benefiting from improved national balance sheets and will continue to do so. Shares of developed-markets companies with significant sales in emerging countries offer another fine way of capitalizing on higher growth rates in places such as China, India and Brazil.

Churning out yield will continue to be tricky. The Morgan Stanley committee recommends that tax-sensitive investors favor high-quality municipal bonds over lower-quality issuers because persistent subpar economic growth will continue to put pressure on state and municipal finances. Corporate balance sheets currently look strong, so the committee recommends investment-grade corporate bonds as one safe place to find yield. As alternatives to bonds, master limited partnerships and shares of companies with strong track records of raising their dividends also look attractive for 2013.

Within U.S. stocks, the Morgan Stanley committee predicts that growth will beat value in 2013 and that shares of large companies will beat those of small companies. That's because large, growing companies generally sell more of their products into emerging markets and because such stocks currently look cheaper than value stocks and small-company stocks.

Both gold and commodities also make Morgan Stanley's recommended list. Gold does because the easy-money policies of the Federal Reserve and other central banks are likely to drive currencies lower and to fuel inflation. Strong growth of emerging countries should also fuel higher commodity prices, the committee says.

Lastly, companies in the water industry, such as ones that produce infrastructure or filtration systems, should be winners in 2013, Morgan Stanley says. Water shortages already exist in areas from India to Africa to parts of the U.S., and climate change and urbanization are exacerbating the problem. The committee points to the ISE Water Index for tracking this theme -- the index's top positions include Ashland (symbol ASH), a chemical company, and Flowserve (symbol FLS), which makes pumps and other infrastructure components.

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