BMO’s report “More Silver Linings than Clouds” found while both the stock and bond markets have made significant recoveries domestically, the European economy has inched toward recession. Despite debt in the southern countries, the European Central Bank (ECB) and the European Union (EU) developed plans that have already produced some positive results, including decreased interest rates, establishment of emergency reserves, the avoidance of a recession in Germany and France, a rebound by the STOXX Europe 600 Index and the introduction of the ECB as bank supervisor for the EU.
China’s slowdown, which was induced by measures taken to moderate inflation and rapid growth, has been exacerbated by Europe’s weakness. As a result, their government has taken reverse actions to jump-start demand. Several encouraging trends include: decreased lending rates, export growth turned positive, steadied gross domestic product (GDP) and increased retail sales.
The U.S.–fiscal cliff aside–has been benefiting from powerful trends in consumer confidence and an uptick in the housing sector. Some optimistic economic signs include: rising consumer confidence and retail sales, housing upswing, rising employment rates, positive manufacturing activity and solid corporate operating margins.
BMO sees opportunity in equities worldwide due to dividends that equal or exceed Treasury yields. They recommend U.S. investors have U.S. equities as the largest portion of their stock portfolio.
Investors seeking more income have moved to riskier fixed-income sectors, but BMO says investors should be aware of the interest rate and credit risks of this strategy.
The report is available here.