The market will continue to be challenging and it is tough to make a judgment call at this juncture. News and headlines rather than fundamentals will continue to drive markets and as such, volatility will continue into 2012 largely driven by the lack of clarity with regards to the Eurozone debt crisis, the US debt problem compounded by slowing growth in the US economy. There is no quick fix or immediate resolution to these issues as the problems plaguing developed economies are deep rooted fundamental issues such as mounting debt, low growth and high unemployment.
In the case of the European Union, the fragmented economic and political governance of their common monetary union is working against them as leaders struggle to find an equitable solution to giving aid to highly indebted countries in the South of Europe such as Greece, Spain, Italy and Portugal, without overburdening financially stronger countries such as Germany and France. And for the US, their economy has not recovered since the Global Financial Crisis in 2008 as evidenced by weak home prices and the stubbornly high unemployment rate.
As such, we expect global growth in the next two to three years to be slow and challenging as the G3 economies; US, European Union and Japan, try to resolve their economic problems. The G3 economies contribute 55% of the total world Global Domestic Product (GDP), combined. Even growth from the Emerging Markets (EM) such as China and India will not be able to pick up the slack left by the G3.
However, it is not all doom and gloom. The potential remains in the EM where the structural growth story remains intact supported by strong fundamentals: rising middle class income, young population, stronger government reserves and healthier corporate balance sheet. Inflation in this region is no longer a threat and is seen to be easing. This means that there will be more room for the governments to maneuver and start its policy loosening cycle. Brazil’s central bank took lead in cutting interest rate end-August 2011, after which many other economies follow suit.
A positive point to note is, there is still a lot of liquidity sitting on the sidelines. That will be supportive for the market as long as market sentiment remains confident. That said, we are cautious on the economic and market outlook for 2012 due to the headwinds coming our way from the external front.
From a macro perspective, our investment strategies and tactics in 2012 will be guided based on the following five pointers:
- Attractive Valuations. Currently, there are some buying opportunities. However, those are not at rock bottom prices yet.
- Economic Data Improvement. The US economy has been surprisingly resilient and this is showing in its encouraging production and employment data. Meanwhile, China may be entering a monetary loosening phase, considering inflation is no longer a threat. The latter will bode well for the China’s stock market, which is directly correlated to market liquidity. On the other hand, positive production data from the US translates to a pick up in production and business in Asia.
- Shock and A "WE" in Policy Action. We are still not seeing this happening at a sustainable level just yet. The coordinated efforts by the global central banks such as the Bank of England, Bank of Japan, European Central Bank and the Swiss National Bank in cutting rates for the US Dollar liquidity swap lines and the agreement achieved at the EU Summit on 9 December 2011 were good start. But, more needs to be done to ‘awe’ the market.
- Market Stops reacting to Negative News. Not yet, as of time of writing.
- Elevated Cash Levels. About half of the smart money is sitting on the sidelines, while the other half is slowly flowing back to the market. What will change this trend is a sustained normalization in the market trend before the bulk of the money comes back in. Besides, most of the smart money have already sold down their positions and come January 2012, the market should see a brief pick up (barring any major events happening) due to the Capricorn Effect.
What can Investors Do?
Always buy into companies with solid fundamentals, strong corporate governance and management team, and a healthy balance sheet. Keep a defensive stance by investing in high quality dividend yielding stocks and consider fixed income assets in your investment portfolio (if you have not already done so) to smoothen volatility.
If you cannot stomach the volatility in the stock market and it keeps you up at night, an option would be to consider dividend-yielding or fixed income unit trust funds. It provides consistent income with the added kicker of capital appreciation, while keeping volatility at a manageable level. Then, average-in, rather than taking the plunge to lower the overall cost of investment and avoid timing the market, as even the professional investor could not get the market timing right all the time.
Source: HwangDBS Investment Management
