The investment outlook for 2012

23rd December 2011

Equities over bonds

But the world's best known individual investor – Warren Buffet, the legendary "sage of Omaha" has a more confident take. Although he is traditionally loath to predict markets directions, he is a firm believer in the long term value of equities over other asset classes – it's how he's made his billions.

He believes shares are cheaper than bonds: On US investment site Rational Walk, he says:

"It's quite clear that stocks are cheaper than bonds. I can't imagine anybody having bonds in their portfolio when they can own equities, a diversified group of equities. But people do because they, the lack of confidence. But that's what makes for the attractive prices. If they had their confidence back, they wouldn't be selling at these prices. And believe me, it will come back over time."  So forget, he implies, bonds, gold and other investments which are not forward looking.

Emerging markets were submerging in 2011.  Fidelity China Special Situations from veteran fund manager Anthony Bolton is now trading at 73p – compared with last year's much-hyped launch at 100p.  It has been as low as 69p.

But some asset allocators predict a better year for emerging markets in 2012. Moneyfacts reports: "More than a quarter of respondents to the Association of Investment Companies' (AIC) annual fund manager poll believe emerging markets (27%) will be the best performing region next year. Stocks across the pond have also been heavily backed with the US coming second in the survey with 19% of the vote."

The Global View

Allan Conway, head of Emerging Market equities at investment house Schroders , says underlying fundamentals are still strong. In a video  he says that while it will pay not to be too heroic –  he is not taking strong positions at country or stock level in his portfolios – he reckons emerging markets are likely to grow at 6% per annum, with some individual markets showing much higher growth.

He adds: "It is in Europe and the US where all the problems are. There are simply not the same problems in emerging markets." He goes on to suggest that emerging market equities may be a ‘safe haven'. 

Elsewhere, however, pundits are playing the only safe card they know – predicting volatility until at least there is some eurozone clarity.

In fact, almost every prediction has been prefaced with a view that until the Eurozone debt crisis is resolved, markets will continue to defy rational investment analysis

As a result, instead of predicting the top asset class for 2012, most experts have settled for predicting ongoing volatility in markets: Reuters reports that many are opting for the "uncertain and unsettled" model while a Russell Investments survey reported on Citywire finds "most managers believe volatility will continue".  An improved situation for the eurozone debt crisis was the most cited reason by the 30% of participants who saw volatility easing.

So with markets likely to vacillate during euro uncertainty, the overall valuation of equities is less of a preoccupation in the short-term. However, it is still important over the long-term and plenty of experts have been willing to give views on whether equities are over or undervalued – based on technical indicators.

The Russell survey found: "Amid uncertainty about the growth prospects in Europe, US large caps were most favoured by investors. On US equity in more general terms, only 6% of respondents saw the market as overvalued." 

Another Year Of Uncertainty?

Just how long will the uncertainty continue?  Adam Cordery, head of European & UK credit strategies at Schroders, estimates that a final resolution could be five to ten years away.  But his colleague, head of UK Equities Richard Buxton hopes that the markets can put the Eurozone crisis behind them and begin to focus on corporate fundamentals, but admits it may not happen in the short term. 

In a climate of uncertainty, the majority of asset allocators are inclining towards equity income strategies. These offer some protection from volatility, plus the appeal of money in the bank from dividends. Trustnet sums up the views of many experts saying "As a consequence, one of the few sectors where cash is flowing  into dividend paying stocks as a replacement for earnings lost out to low yielding debt.

Darius McDermott, managing director of IFA Chelsea Financial Services, picks up the theme. He says: "Given the continued macro uncertainty we are unable to predict which way the markets are going to go. If the EU leaders come to some sensible solution the markets could recover.

"Our general favourite is dividend paying stocks and dividend paying funds. Dividend investing makes up for two-thirds of equity return over the long term."

Pessimism Abounds

And there are the out and out pessimists. The This is Money website says: "Respected analyst Jeremy Grantham warned in May 2011 that stocks were 40% overpriced. Money Week's Merryn Somerset Webb has gone further. She says shares are overpriced based on 'the only reliable indicator of market performance'… Stock markets are almost impossible to value without the benefit of hindsight. Somerset Webb says the 'cyclically-adjusted price-to-earnings ratio' (CAPE) is the best bet and it suggests the US market is 'not remotely cheap'. .. The highly regarded economist Robert Shiller, who came up with the concept of CAPE, estimated in September 2011 that the US market was 21 per cent too expensive."

Individual investors remain disillusioned, skeptical and fearful of trusting any "expert", according to community commenters. On the CNBC site, for example, upnorth85 says: "Abby Cohen of Goldman had a target of 1450 for S&P. She revised it down to 1400 mid-year. Now she says this is the target for next year end. If you look at all predictions, they are based on hope not modelling or being realistic. Everyone hopes by next year end we will be better off. In 10 years we will realize, hey our feds have turned the US in to a mini-Japan where we are in a permanent twilight zone no escape."

It is a sobering thought and investors would be forgiven for thinking markets will never find their way through the current economic crises. Fortunately, history suggests otherwise.


More from Mindful Money:

2012: Official beginning of another Great Depression?

Equities – A reason to be cheerful?

5 Trends: Can futurists help investors pick the winners of 2012?

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