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JPMorgan picks U.S. banks, emerging market stocks for 2013

Since the crash four years ago, investors have been terrified that another financial collapse may lie just ahead. That's why Europe's sovereign debt crisis has caused such deep unease, as have fears that China might have a hard landing or that the U.S. might tumble over the so-called "fiscal cliff" of automatic spending cuts and tax increases set for Jan. 1. Investors have been scarred, and remain easily scared.

But Michael Hood, global market strategist for J.P. Morgan Asset Management, is predicting that this mood of apprehension will finally dissipate over the next year. In his view, 2013 is going to be a year with a return to more normal economic conditions worldwide.

Europe will begin to grow again, albeit at a slow pace. Emerging market economies have also been uncharacteristically weak over the past two years compared to growth in North America, but he foresees a return to the kind of higher-octane economic activity we're all used to seeing in places like China. Meanwhile, major central banks will continue to make sure that we avoid a dangerous bout of deflation.

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"We're not going to see the realization of the highly negative scenarios that people have worried about in the last few years," he said in an interview.

"So what we're talking about next year is the reacceleration back towards the norm for the international economy." Mr. Hood offered his view that the glass is half full to The Globe after making the rounds in Toronto delivering his 2013 outlook to institutional clients of the big New York-based investment firm, which has $1.4-trillion (U.S.) under management.

Looking for investments ideas based on calmer economic conditions, Mr. Hood says one choice would be a diversified basket of emerging market equities, particularly as China's recovery begins to pull the rest of Asia up with it. "I think that this climate will be favourable for some of the higher beta investments that have not done so well this past year and emerging market equity is an obvious example of that," he said.

If international growth accelerates, as he expects, another money making prospect will be shares in big multinational companies, along with cyclical stocks, such as energy, materials, and technology companies.

Among commodities, Mr. Hood favours copper, which is levered to international growth rates on the demand side and also has supply constraints. There is also modest upside for oil. Mr. Hood doesn't have much patience for gold bugs and their doomish views on the inevitable demise of fiat currencies.

"If you're buying gold … because you're worried about currencies collapsing or something, then I would say: 'Don't worry about that.'" Those buying bullion based on a fear of inflation should instead consider investments that provide income plus some upside if consumer price indexes rise. Among the possibilities are real estate and inflation linked government bonds. One of the benefits of real estate as an inflation hedge is that investors are likely placing bets in the sector at what will later be seen as a low-price entry point.

European bank shares have been hard hit by crisis worries and would rebound during improving conditions, but Mr. Hood believes that investors should buy U.S. banks instead. The price movement of U.S. financials is highly correlated with their European rivals, with the added kicker that they benefit from the improvement in the U.S. real estate market. U.S. government bonds are pricey and don't represent compelling value at current low yield levels.

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To be sure, there are some worries. Mr. Hood says the "fiscal cliff" is the "most likely accident out there," but he cautions that "if we can get over that hump … the sort of free-floating recession fear this next year is much less likely to reappear."

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