LONDON Emerging debt, high-dividend stocks and alternative assets such as infrastructure are the best way to play 2013, while risks are rising for "safe" government bonds, ING Investment Management said on Tuesday.
Jelle van der Giessen, the company's deputy CIO, said he was "slightly, moderately optimistic" on the year ahead as economic growth bottoms out and receding euro zone risks induce more people to put cash to work.
While that could be broadly positive for equities - ING IM envisages a 7 percent uptick for world stocks next year - van der Giessen who helps manage 310 billion euros, said government austerity programs and the impact on growth could challenge company earnings and stock markets.
"Unless you were looking for income it could be a difficult year for equities," he told the Reuters Global Investment 2013 Outlook Summit. He said he favored European equities with a 4 percent dividend yield to their U.S. counterparts which yield around 2.5 percent.
"On emerging equities too I would focus on high-dividend stocks," he told the summit, held at the Reuters office in London.
World stocks have risen around 10 percent this year but the top-performing asset classes have been emerging debt with dollar bonds returning more than 16 percent year-to-date. Returns on German and U.S. debt have been 5-6 percent in dollar terms.
Van der Giessen expects emerging debt to continue outperforming but he is less keen on core government bonds where yields have collapsed to multi-decade or even record lows in recent years as the euro crisis escalated. Some short-term debt yields are even in negative territory.
That has raised concerns of a "bond bubble" with investors likely to suffer if an improvement in the global risk and growth picture sends yields spiking higher.
That could be the case if euro zone risks abate. Bunds have taken a hit, for instance, from Tuesday's aid deal for Greece.
"Spread products should be a very interesting investment including emerging market debt. There is an opportunity still there, with 6.5 percent yield on high yield (debt), so I think there is enough room to grow," van der Giessen said.
But investors should beware of so-called safe debt, he warned, though he does not expect yields to rise substantially in 2013. Secondly, the 1.4 percent yield on 10-year German Bunds is insufficient for pension funds with huge liabilities.
"There should be a reasonable worry that this is not a risk-free investment," he said.
Instead ING IM advises risk-averse investors to buy the debt of a select group of countries such as Sweden and New Zealand, which have smaller debt markets but strong solvency ratios.
"If you really want to be safe, then go to these types of countries where everything is in order instead of those that issue lots of debt," van der Giessen said.
He also contrasted low yields paid by sovereigns such as Germany with healthier returns on alternative assets such as real estate, infrastructure and export credit agency loans.
"Instead of taking a 30-year German Bund, 30-year infrastructure will require some additional capital but returns are nicely above ... 3-4 percent."
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(Additional reporting by Alice Baghdjian; Editing by Susan Fenton)