Russell Investments’ 2013 Global Outlook: Risk-on/Risk-off Scenario Likely to Continue amid Modestly Positive Gains

Ongoing volatility, possible recession in Europe likely will be countered by continuation of growth, albeit slow, in U.S. and Chinese markets

SEATTLE--()--Russell Investments' team of global investment strategists has released the firm's 2013 Annual Global Outlook, highlighting core expectations for capital markets as well as a point of view on six central issues for the coming year.

Russell’s forecast for 2013 predicts a modestly positive, albeit volatile investment environment, noting that investors are likely to see more signs of a global recovery, driven primarily by a continuation of U.S. and Chinese economic growth. Even so, volatility will likely remain elevated through most of the year, driven by the tug-of-war between deflationary austerity and reflationary monetary policy in the eurozone.

Russell’s investment strategists outline and discuss the following six key themes in the global outlook that they believe will have the greatest impact on markets and asset returns in 2013:

1. U.S. market: Addressing long-term issues at last?

2. Eurozone: Finding the right policy mix

3. Global equities: A rising tide may not lift all boats equally

4. Emerging markets: Due for outperformance

5. Global currency outlook: More of the same, but risks aplenty

6. Commodities: It’s not just about monetary policy

Russell has forecast since 2009 that the U.S. economy would follow a square root-shaped recovery pattern, and events have played out consistently with these expectations. For 2013, Russell’s base case scenario anticipates a continuation of this reluctant-yet-measurably-positive recovery pattern.

“The U.S. strikes us as an undervalued field, both in terms of the equity pricing and overly pessimistic economic growth expectations,” said Pete Gunning, global chief investment officer, Russell Investments. “We would be surprised if the equity market does not cash in that value by the end of the year.”

The “Squeeze Play”: Searching for Real Returns in a Yield-Starved World

On the other side of the square root-shaped recovery with real interest rates in negative territory is the reality that investors still have the demand of a real return on their assets. In view of the dynamics of the U.S. recovery, lingering impacts of the Great Recession and intervention by the U.S. Federal Reserve, Russell forecasts that the net effect on investors will be that of “squeezing” them out of traditional safe-haven assets and forcing them further up the risk curve.

“Since only positive real returns build wealth, investors are forced to confront the question of what is to be done in a yield-starved world. This ‘squeeze play’ impulses people into riskier assets; we continue to advise clients to proceed purposefully and with strategic discipline,” said Gunning. “For investors, this means attention to every detail of their portfolio management. We believe regional diversification will need to be firmly in place, as the economic center of gravity will continue to shift. As traditional investments remain flat, alternatives likely will matter more than ever. And volatility, while it certainly brings market stress, will also bring market opportunity for multi-asset, dynamically-managed portfolios.”

Russell’s Core Expectations for 2013: Highlights

  • The square root-shaped recovery will continue, with U.S. economic growth of 2.1% for 2013, increasing to 2.5-2.75% by the second half of the year.
  • Tepid U.S. core inflation for the medium term at 1.9%.
  • U.S. 10-year Treasury yield at 2.15% by year-end 2013.
  • Real-time indicators are not pricing in a fiscal-cliff disaster, but rather a smaller degree of fiscal drag.
  • A cyclical recovery for the Chinese economy delivering GDP growth of around 8% in 2013.
  • A eurozone which will remain intact, with a continuing tug-of-war between austerity and growth.

“Based on our central-tendency scenario of 2.1% real GDP growth and modestly rising bond yields, we project that the percentage rise in the U.S. stock market will be in the upper single-digits in 2013,” said Russell’s Chief Economist Mike Dueker. “This assessment includes projections of corporate profit growth slowing to align with nominal GDP growth and the equity risk premium dropping slightly as doomsday scenarios diminish in likelihood.”

Considering this scenario, the projection for the Russell 1000® Index is a target of 830 at the close of 2013, which would reflect a 5.8% increase from 784.5 as of market close on Dec. 7. 2012.

About Russell Investments

Russell Investments (Russell) is a global asset manager and one of only a few firms that offers actively managed multi-asset portfolios and services that include advice, investments and implementation. Working with institutional investors, financial advisors and individuals, Russell's core capabilities extend across capital market insights, manager research, portfolio construction, portfolio implementation and indexes.

Russell has about $159 billion in assets under management (as of 9/30/2012) and works with 2,400 institutional client and more than 580 independent distribution partners globally. As a consultant to some of the largest pools of capital in the world, Russell has $2.4 trillion in assets under advisement (as of 12/31/11). It has four decades of experience researching and selecting investment managers and meets annually with more than 2,200 managers around the world. Russell traded more than $1.5 trillion in 2011 through its implementation services business. Russell also calculates approximately 700,000 benchmarks daily covering 98% of the investable market globally, more than 80 countries and more than 10,000 securities. Approximately $3.9 trillion in assets are benchmarked to the Russell Indexes.

Russell is headquartered in Seattle, Washington, USA, and has offices around the world including Amsterdam, Auckland, Beijing, Chicago, Frankfurt, London, Melbourne, Milan, New York, Paris, Seoul, Singapore, Sydney, Tokyo and Toronto. For more information about how Russell helps to improve financial security for people, visit www.russell.com or follow @Russell_News.

These views are subject to change at any time based upon market or other conditions and are current as of the date at the top of the page. The opinions expressed in this material are not necessarily those held by Russell Investments, its affiliates or subsidiaries. While all material is deemed to be reliable, accuracy and completeness cannot be guaranteed. The information, analysis, and opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations for any individual or entity.

Please remember that all investments carry some level of risk, including the potential loss of principal invested. They do not typically grow at an even rate of return and may experience negative growth. Investing in commodities, emerging markets and real assets present unique risks and may be more volatile than other asset classes.

Forecasting represents predictions of market prices and/or volume patterns utilizing varying analytical data. It is not representative of a projection of the stock market, or of any specific investment. Keep in mind, like all investing, multi-asset investing does not assure a profit or protect against loss.

Investment in Global, International or Emerging markets may be significantly affected by political or economic conditions and regulatory requirements in a particular country. Investments in non-U.S. markets can involve risks of currency fluctuation, political and economic instability, different accounting standards and foreign taxation. Such securities may be less liquid and more volatile. Investments in emerging or developing markets involve exposure to economic structures that are generally less diverse and mature, and political systems with less stability than in more developed countries.

Currency investing involves risks including fluctuations in currency values, whether the home currency or the foreign currency. They can either enhance or reduce the returns associated with foreign investments.

Investments in non-U.S. markets can involve risks of currency fluctuation, political and economic instability, different accounting standards and foreign taxation.

Diversification, strategic asset allocation and multi-asset investing do not assure profit or protect against loss in declining markets.

The Russell 1000® Index measures the performance of the large-cap segment of the U.S. equity universe. It is a subset of the Russell 3000® Index and includes approximately 1000 of the largest securities based on a combination of their market cap and current index membership. The Russell 1000 represents approximately 92% of the U.S. market.

The trademarks, service marks and copyrights related to the Russell Indexes and other materials as noted are the property of their respective owners. The Russell logo is a trademark and service mark of Russell Investments.

Indexes are unmanaged and cannot be invested in directly. Returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment.

Russell Investment Group, a Washington, USA corporation, operates through subsidiaries worldwide including Russell Investments. Russell Investment Group is a subsidiary of The Northwestern Mutual Life Insurance Company.

Russell Investments is the owner of the trademarks, service marks and copyrights related to its indexes.

CORP-8175

Contacts

Russell Investments
Steve Claiborne, 206-505-1858
sclaiborne@russell.com
or
Benjamin Rippey, 718-801-8203
brippey@neibartgroup.com
or
For real-time news updates, follow @Russell_News on Twitter

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Russell Investments' Chief Economist Mike Dueker discusses the 2013 Annual Global Outlook.

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Release Summary

Russell Investments' team of global strategists has released the firm's 2013 Annual Global Outlook, highlighting their economic expectations for the year ahead.

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Contacts

Russell Investments
Steve Claiborne, 206-505-1858
sclaiborne@russell.com
or
Benjamin Rippey, 718-801-8203
brippey@neibartgroup.com
or
For real-time news updates, follow @Russell_News on Twitter