2012 Forecast
December 23rd, 2011
It’s that season when we need to forecast next year. 2011 has been disappointing for many investors, and bruising for those who remained too bullish for too long. Can we look forward to something better in 2012?
There is no natural reason why things should suddenly change on January 2nd when the markets re-open after a holiday. Often the safest kind of forecast is to say more of the same. After all, there is no sign of resolution of the rolling and rumbling Euro crisis in sight. The politicians who have so far failed to solve the outstanding problems of the European single currency, or the yawning gap between the Federal revenues and expenditures, are not about to miraculously agree a comprehensive solution to our woes that will power mighty new bull markets.
Many forecasters stick with the pack of other forecasters. So what are they saying? They tend to believe the main governing authorities of the world, who want us to believe in muddling through. They expect little or no growth in Europe, slow growth in the USA, and better growth in the emerging market world. They anticipate continuing banking weakness but no spectacular collapses. They think the EU will save its currency, combining more austerity with more lending to the troubled countries and banks. Interest rates will remain at very low levels in the west, and should fall a bit in Asia and Latin America.
All this points to poor returns on cash and near cash, with continuing fears of losing money on more risky assets. That is the investors’ nightmare situation.
It is always worth asking whether the change of year could change something more? Year ends and new years do get more people to ask basic questions about what they are doing and what might work better. Moods can change anytime, but a new year is a concerted effort to change moods. The establishments of the West have got many things wrong since 2005, following boom and bust policies in the last decade, and staggering from short term fix to short term fix in this.
I think it unlikely that 2012 will be a simple re run of 2011. There are three big areas of possible difference.
The first is in the emerging market world. Brazil and China have taken enough action to curb inflation. They can return to increasing domestic demand. They will need to offset declines in western demand for their exports. India should get to a similar position in 2012. These countries can cut interest rates, can create more money, can increase domestic real wages and augment home demand. These are usually positive conditions for equity investment. The Chinese and Brazilian share markets look cheap.
The second is the Euro area. It is possible markets force more decisive structural action on the members. It is also possible political developments in distressed Euro countries sour as they live through another year of austerity and falling incomes, putting pressure on the political leaderships to change course. We continue to advise avoiding all Euroland assets until the outlook is clearer. There might come a time when German assets look cheap, if they do decide to drop the weaker members from the Euro altogether. German assets are not expensive today, but they will continue to be damaged by association with the Euro and the stresses in the system.
The third is Anglo-Saxon sovereign bonds. These have done well again this year, despite the low yields. They have been seen as a safe haven in a troubled world. UK ones have been boosted by another round of quantitative easing. This could go on for a bit longer, as the UK may well adopt more of this unorthodox monetary medicine in the new year. However, 2012 may be the year when global investors decide the yields on US and UK government bonds are low and so they become less attractive. At current income levels investors are relying on further capital gains to get a decent return.
