For a global perspective on the challenges facing the equity markets at large—and the potential values to be had as a result, we turn to Peter Langerman, chairman, president and chief executive officer of Mutual Series®.
Peter A. Langerman, Chairman, President and Chief Executive Officer
In 2013, we expect investors to face ongoing uncertainty about the strength of the U.S. economic recovery, resolution of the eurozone debt crisis and the pace of Asian growth. In our view, U.S. investors and businesses will likely continue to wait for more clarity on U.S. fiscal policy as well as the Fed’s quantitative easing programs. We expect further progress will be made toward the construction of a European solution to the sovereign debt crisis but recognize that the process is complex, cumbersome and seems to require market pressure to force progress. In Asia, we continue to watch China closely given the potential global ramifications of the country’s slower economic growth and leadership transition.
As a result of these continuing headwinds, we expect market volatility to persist and anticipate potential negative effects on real economic activity, as companies struggle with the effects of such turbulence on running their businesses. In such an environment, we view undervalued securities with potential catalysts for value realization as an attractive opportunity for patient and discerning investors. We’ve observed degrees of indiscriminate devaluation associated with prior periods of higher volatility and stock price correlation. Therefore, we will continue to look for high-quality companies with global franchises that have been, in our opinion, unfairly penalized by investors while also maintaining a medium- to long-term perspective and a clear focus on risk.
Moving into 2013, we think the market environment continues to be favorable for mergers and divestitures, as many corporations are generally underleveraged and possess cash-heavy balance sheets. Nonetheless, we expect that merger and acquisition (M&A) activity may remain subdued, as many potential buyers seem reluctant to act amid the aforementioned economic uncertainty, and potential sellers appear to be of the opinion that greater value may be realized by waiting until conditions improve.
Similarly, investment opportunities may also remain limited among distressed debt securities. The ongoing low-rate environment has increased competition for assets that have potentially attractive yields, such as distressed debt. This trend has enabled many companies to obtain access to capital at rates below what we believe their risk implies. This low-rate environment has reduced the financial burden on highly levered institutions and, as a result, the rate of corporate bankruptcies has become lower than we would have anticipated. However, we remain opportunistic and ready to invest should the right opportunity arise—whether it be a distressed debt or merger situation.
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What Are the Risks?
All investments involve risk, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Investments in foreign securities involve special risks including currency fluctuations, economic instability and political developments. Investing in companies engaged in mergers, reorganizations or liquidations involves special risks, as pending deals may not be completed on time or on favorable terms, as well as lower-rated bonds, which entail higher credit risk.