Market Predictions for the Rest of 2013

The housing market is normalizing, China’s growth is slowing and people are concerned about what interest rates will do next. These issues worried investors in the first half of 2013 — will they be as big in the second half of the year? Or will new ones pop up to contend with?

Business Insider has broken down the 21-page note Morgan Stanley sent to clients. In it, strategist Adam Parker broke out the 10 biggest investment questions that will dog investors for the remainder of the year.

Sector bets

Morgan Stanley believes that the Health Care, Industrials and Technology sectors will be overweight while Staples and Discretionary are underweight this year. Financials, Materials, Telecoms, Utilities and Energy will perform in line with the rest of the market.

Price-Earnings

Morgan Stanley’s Parker expects a modest increase in the price-earnings ratio because it’s unlikely that corporate earnings will be reduced. And if a bear case should surface, it won’t be very acute.

Interest rates

There is a lot of concern that the Fed could change course, which will affect investments, but Parker seems confident that Ben Bernanke and the Fed will “remain accommodative for another year.” Bond yields will hover around the current level for a few months.

U.S. corporate sector

Parker doesn’t expect the corporate sector to contribute to growth because a large capital spending surge is neither necessary nor required.

Cyclical vs. defensive stocks

When yields were backing up, there was an anti-defensive sentiment, but Morgan Stanley says investors should own a little bit of both stocks. However, the company recommends avoiding stocks with “high exposure to a strong acceleration in China infrastructure.”

Housing opportunities

As the housing market is recovering and getting back to normal, investors should be careful about timing housing-related stocks. Parker says that these stocks may perform more poorly as hew housing starts “normalize to the long-term trend of 1.2 to 1.3 million.”

Key energy issues

WTI and Brent crude prices have converged, but the energy sector should provide returns in line with the rest of the market, according to Morgan Stanley.

Exposure to China

Morgan Stanley is more bullish on China because even if it grows slower (at 4% or 6%) it will still likely be better than the U.S. or Europe. In fact the company thinks “the anti-China pendulum has swung too far,” Business Insider writes.

Europe

Over the last two years, Europe has given the rest of the world numerous mini scares that were typically overblown. Although there are still issues, any further concerns shouldn’t affect U.S. stocks as much. Morgan Stanley doesn’t think Europe will matter much in the second half of 2013.

Capital spending

This year cash will be used for one of two purposes: dividend growth and M&A.