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Ace stock picker says U.S. will ride out Cyprus storm

(MoneyWatch) Brian Belski was almost exactly on the mark last year in predicting where the S&P 500 would end up in 2012. The Chief Investment Strategist at financial firm BMO Capital Markets was only point off the the stock index's year-end close of 1,426.

This year Belski is looking for the S&P 500, which hovered around 1,550 in Wednesday morning trade, to edge up to 1,575. But that doesn't investors can expect a smooth flight. "Stocks must digest the strong gains at some point, leading to what we believe will be increased periods of volatility for the remainder of 2013," he said.

I spoke with Belski to get his take on the state of the financial markets, including how the latest flare-up in Europe's economic crisis is likely to affect stocks.

Lulu Chiang: All eyes are on Cyprus this week now that lawmakers have rejected a proposed tax on bank depositors, which jeopardizes a bailout of the country by other European states. How will that impact the U.S. market in near-term?

Brian Belski: The impact will be minimal on the U.S. because Cypress is 0.5 percent of eurozone GDP, which is a declining asset anyway. Our call all along has been that North American companies, especially in the U.S., will benefit from consternation and volatility in global markets.

LC: But isn't there a legitimate fear that the banking panic in Cyprus could spill over to Italy, Spain and other ailing countries in the eurozone?

BB: Yes, but remember that Italy and Spain have been having issues for a while. That is why we are bit cautious on stocks overall on a near-term basis. We will likely see increased volatility, and remember that the S&P 500 peaked in the first half in 2012 and 2011.

LC: Why are U.S. financial markets still the place to be for investors?

BB: Thanks to the massive structural change in U.S. corporates (excluding financial companies) in the past 10 to 13 years, the U.S. has positioned itself as the most stable and consistent fundamental asset in the world. Volatility around the world also will help fuel the manufacturing renaissance in the U.S., coupled with the strong fundamental attributes of companies.

LC: How do company earnings and valuations look?

BB: Earnings are of increasing quality, and cash flow is prevalent and robust. Valuation remains below historical norms and is likely to increase, and that's OK.

LC: What sectors do you invest in?

BB: I recommend being "overweight" in industrials thanks to a domestic manufacturing revival. Energy stocks look attractive as we move closer and closer and closer to U.S. energy independence. Keep in mind that it's a very long-tailed trade, but very real. Technology is the premiere innovator and cash cow -- those are no longer the "go-go" stocks of the 1990s, but rather a mean and lean asset brimming with cash.

LC: What sectors do you avoid?

BB: We're underweight telecom and utilities because they are expensive and not growing.

LC: What's your single best investment idea for 2013?

BB: Stocks, especially value strategies and dividend growth.

LC: It's obviously been a tremendous run for stocks since 2009. And yet according to a recent survey by a prominent economics forecaster, 28 percent of Americans have no confidence that they will have enough money to retire comfortably. What's your advice for average investors who are still struggling to regain their balance after the housing crash?

BB: The proof is in the pudding. Once investors understand that bond funds are likely to post negative year-over-year performance numbers later in 2013, they will feel first hand that they are losing money in their preferred asset class of choice -- one that they purchased because they firmly believed that they would not lose money. As time goes on and equities post positive results, they will return to stocks.

LC: But what if you are nearing retirement and can't afford to take much risk in the stock market? What then?

BB: The risk is in owning bonds now -- people do not understand that. Remember, investing is not binary; it's not an "either stocks or bonds" question. As such, investors should be balanced -- at least 60/40 stocks/bonds -- especially since stocks are likely to outperform for the majority of the next 15 years. Therefore, the best strategy is to invest in dividend growth -- not high yield, but in those companies who have demonstrated the ability and track record of paying and raising the dividend.