December 26, 2012
A high-conviction investment idea
One of Gundlach’s “most high-conviction investment ideas” stems from his assessment of Japan’s economy. The likelihood that Japan will ease monetary policy means that investors should short the yen versus the dollar – or even the euro – he said.
Those investors should also go long the Japanese stock market, which is something that Gundlach has not previously recommended. Debasement, he reasoned, would spur exports and benefit Japanese industries.
“I wouldn’t be surprised if the Nikkei, which has risen about 10% or so from its low just a month ago, found its way higher by a couple or even three thousand points during the year 2013,” he said.
Gundlach also noted other investment opportunities, for which his degree of conviction was somewhat lower.
The Shanghai is cheap, he said, particularly relative to the S&P. It would serve as a good hedge against the possibility of a “disaster” in the global economy, or it would do well if inflationary policies lead to broad market rallies.
Investors should be careful with emerging markets until food prices stop rising, Gundlach said, because in those economies food is an exceptionally large part of the average household’s budget.
Gold has generally fared well during this era of global quantitative easing, Gundlach said, a relationship that he considers “fairly convincing and fairly logical.” “If you’re thinking of QE forever and QE on a coordinated basis coming more and more,” he said, you should favor gold over stocks.
In the US, Gundlach said, Fed purchases of mortgages have made prices in the non-agency market “incredibly unattractive,” and he is looking at “certain other sectors that are less affected by the negatives” of the Fed’s program.
Gundlach said he has been negative on mortgage REITs for the last several months, since it became evident that Fed activity would lead to increased prepayments on the underlying securities. He expects dividends to be cut on REITs, which would cause prices to decrease.
Interest rates have bottomed in the US, Gundlach said, reiterating comments from his previous conference call. The bottom for the 10-year Treasury note was 1.39% on July 24. Volatility in the fixed-income markets was low in 2012, but he expects it to pick up next year.
Nor will interest rates in the US move sharply higher. Gundlach said the Fed could keep interest rates low for an indefinite period of time, through open-market purchases of bonds. He said the Fed would continue to expand its balance sheet in 2013.
Gundlach said he expects the return on Doubleline’s Total Return Fund (DBLTX) for 2012 to end up slightly more than the 8% to 9% he forecast at the beginning of this year. For next year, he said he hopes the fund will return 6%.
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