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Assessing ISG's "Ten for '12"
Neuberger Berman
By Investment Strategy Group
December 26, 2012

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1. Politics: Noise in the U.S., Impact in Europe

As expected, the U.S. government made no important policy decisions on government budget and tax reform in the run-up to the November presidential elections, despite months of bickering. Now, the political gridlock appears to be thawing partially, as leaders negotiate a plan to resolve the fiscal cliff. We anticipate an approach by year-end that avoids the worst of the fiscal cliff in the near-term, but which leaves details on major policies until 2013. Meanwhile, in Europe, the debt crisis has eased as expected, with forceful measures by the European Central Bank soothing the fears of investors.

2. Obama Wins Second Term

With unemployment rates hovering above 8% for much of 2012, U.S. President Barack Obama made history by securing a second term—no president before him had won a reelection with unemployment above 7.2%. Despite all the money spent during the campaign, the balance of power in Washington, DC, remains largely unchanged, with Democrats controlling the Senate and Republicans dominating the House of Representatives.

3. The U.S. Economy Avoids Recession

Real GDP growth for the U.S. economy was 2.0%, 1.3% and 3.1%, respectively, for the first three quarters of the year. So it looks like recession has been avoided, with the IMF expecting overall U.S. GDP growth of 2.2% for the full year. This is not too far from the 1.5%–2% that we were expecting. As we anticipated, growth has been steadier than in 2011, when where numbers gyrated between 0.1% and 4.1%.

4. European’s Crisis Reaches Tipping Point

The mid-year Greek elections gave global investors a scare when an anti-austerity candidate gained traction and prompted fears of a disorderly Greek exit from the eurozone. Fortunately, the Greek people and European policy showed their determination to keep the euro bloc intact by agreeing, respectively, to institute reforms and relax austerity measures. As we expected, the euro bloc survived the crisis, with member states and the ECB playing a strong role in resolving issues.

5. China Experiences a "Soft Landing"

For the first three quarters of the year, China’s GDP growth tracked above 7%, a loosely defined threshold for a “hard-landing” scenario. Admittedly, policy action to reinvigorate growth has been slow to materialize, perhaps due to distractions from the country’s decennial leadership transition this past November. But as year-end approaches, indicators including business survey numbers are pointing to near-term acceleration in China, suggesting that the worst of the slowdown may already be behind us.




Source: FactSet.


6. Broadening Global Monetary Easing Cycle

2012 has been a year where global economies saw extraordinary support from their central banks. In emerging markets, we saw interest rate cuts across a whole host of countries, ranging from Brazil to China, as inflationary pressures subsided along with slowing growth. In developed countries, central bank support in the U.S., Europe, U.K. and Japan, which came largely through unconventional measures, offset pressures created by austerity measures and weak labor markets.

7. Favor High-Quality Equities

Year-to-date through December 17, large-cap U.S. equities had gains of 16.3% (S&P 500), outperforming small-cap equities, which posted gains of 14.3% (Russell 2000) and performing in line with developed international equities, which saw gains of 16.3%. (MSCI EAFE). The S&P 500 led performance for most of 2012, but as fears of a Chinese “hard landing” and eurozone dissolution abated in the third quarter, riskier assets began outperforming. Still, volatility for the S&P 500 was around 13% for 2012, which was considerably lower than the MSCI EAFE (16%) and Russell 2000 (18%).

8. Income-Oriented Assets to Offer Attractive Returns

With yields on Treasuries falling to record lows, we believed that demand for income would continue and highlighted master limited partnerships (MLPs) and high yield fixed income as possible beneficiaries. High yield bonds lived up to our expectations by returning 15.6% but MLPs disappointed, with the Alerian MLP Index returning a mere 3.4%. We attribute the weak performance of MLPs to investors’ bearish outlook on energy caused by slowing growth in Europe and emerging markets. Robust MLP equity issuances in 2012 also weighed on prices.

9. Geopolitical Tensions to Remain Elevated

While the European sovereign debt crisis and slowing Chinese growth continued to affect investors throughout 2012, geopolitical tensions emanating from the Middle East and North Korea have been relatively contained—particularly regarding their potential impact on commodity prices and equity markets. While increased U.S. energy production appears to have mitigated some of those risks, increased intergovernmental policy coordination has been important in resolving many of the geopolitical conflicts that could have threatened the markets.

10. Sector Rotation Continues to Be Pivotal

We thought that, in a macro-driven environment, sector dispersion would be dramatic, such that picking the right sectors would be vital to generating significant outperformance. We were correct on this front but, unfortunately, our sector selections were wrong. Among those we favored, only Health Care outperformed the S&P 500, while Consumer Staples, Energy and Information Technology all trailed the index. As it turns out, the best-performing sectors were Financials, Consumer Discretionary, Health Care and Telecom, with each generating year-to-date returns of 20% or more through December 17.


Our best holiday wishes to all our readers! Please look for a new set of expectations early in 2013.


This material is provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. The views expressed herein are generally those of Neuberger Berman’s Investment Strategy Group (ISG), which analyzes market and economic indicators to develop asset allocation strategies. ISG consists of five investment professionals who consult regularly with portfolio managers and investment officers across the firm. Information is obtained from sources deemed reliable, but there is no representation or warranty as to its accuracy, completeness or reliability. All information is current as of the date of this material and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. This material may include estimates, outlooks, projections and other “forward-looking statements.” Due to a variety of factors, actual events may differ significantly from those presented. Investing entails risks, including possible loss of principal. Indexes are unmanaged and are not available for direct investment. Past performance is no guarantee of future results.


This material has been issued for use by the following entities; in the U.S. and Canada by Neuberger Berman LLC, a U.S. registered investment advisor and broker-dealer and member FINRA/SIPC; in Europe, Latin America and the Middle East by Neuberger Berman Europe Limited, which is authorised and regulated by the UK Financial Services Authority and is registered in England and Wales, Lansdowne House, 57 Berkeley Square, London, W1J 6ER; in Australia by Neuberger Berman Australia Pty Ltd (ACN 146 033 801, AFS Licence No. 391401), which is licensed and regulated by the Australian Securities and Investments Commission to deal in, and to provide financial product advice for, certain financial products to wholesale clients; in Hong Kong by Neuberger Berman Asia Limited, which is licensed and regulated by the Hong Kong Securities and Futures Commission; in Singapore by Neuberger Berman Singapore Pte. Limited (Company No. 200821844K), which currently operates under an exemption from licensing under the Financial Advisers Act (Chapter 110) of Singapore for marketing of collective investment schemes to institutional investors; in Taiwan by Neuberger Berman Taiwan Limited, which is licensed and regulated by the Financial Services Commission (“FSC”) to deal with specific professional investors or financial institutions for internal use only, and which is a separate entity and independently operated business, with SFB operating licence no.:(101) FSC SICE no.008, and address at: 11F, No. 1, Songzhi Road, Taipei, Telephone number: (02) 87292308; and in Japan and Korea by Neuberger Berman East Asia Limited, which is authorized and regulated by the Financial Services Agency of Japan and the Financial Services Commission of Republic of Korea, respectively (please visit for additional disclosure items required under the Financial Instruments and Exchange Act of Japan). Except for the foregoing, this material is not intended for use or distribution within or aimed at the residents of any other country or jurisdiction. This document is not an advertisement and is not intended for public use or additional distribution in the following jurisdictions: Brunei, Thailand, Malaysia and China.


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