I have been reading everyone's opinion on what is going to happen in 2012, and it is pretty obvious, really. The best bet for anyone professing crystal ball-reading skills is to say that current trends will continue, so the safest forecast for 2012 is this:
- Europe muddles through much as it is, without collapse or solution.
- Global growth stagnates.
- US economy baselines but doesn't decisively recover.
- China continues to loosen policy with the risk to growth on the unimpressive side.
- Interest rates globally remain close to zero and hit 3.5 per cent in Australia.
- The $A holds above or around parity as it reflects the relative strengths of the Australian and US economies in Australia's favour.
In this scenario everyone would be doing the same things they did this year in equities: exit completely in favour of term deposits dabble in bonds and hybrids buy and hold anything with a reliable earnings' base and high yield (utilities, Telstra), or buy defensive stocks like healthcare, Ansell, Coca-Cola and Woolworths. Oh, and continue to hold banks because we always have and always will, whatever their share prices do.
The danger areas will continue to be resources that rely on China, commodities, hope, optimism and capital raisings. Dishonourable mentions go to print media and retailers as they struggle to meet the internet.
Big Australian companies will continue to access previously unavailable billions in long-term debt through international bond issues at less than 4 per cent, setting up their balance sheets for the next decade. Others will opportunistically tap the retail market with "note" issues that are snapped up as proxies for term deposits (which they are not, but who is bothering to do analyses these days when a big fat yield is involved?).
The other certainty is that the market will continue to be very volatile. Until the European situation is resolved, everyone will continue to focus on risk rather than reward.
In a normal market, reward (profits) change gradually and predictably, and a market priced on rewards moves progressively and almost predictably without shock. However, a market focused on risk is not progressive, nor predictable, because risk can change massively in very short periods and this is where we are at.
The market is being priced on the risk of European collapse versus European solution. It is such a dynamic variable that you simply cannot do much until it is resolved. Plus, with the global financial crisis so fresh in people's minds, every long-term investor is going to stay on the sidelines until this unknown is known.
Any forecaster arrogant enough to call the outcome can be rightly declared more of a gambler than a prophet.
So that is the "likely" outcome for 2012. Boring stuff. The bottom line is that Europe is a huge risk and not knowing has killed interest in the stockmarket and will continue to plague it until one of two possible headlines unfold:
- "Europe collapses." This will create the biggest buying opportunity in decades. There is a mighty rally as certainty returns and historically high yields and low price-earnings ratios are raided by long-term investors.
- "Europe prints money, collapse averted." After a short and sharp rally in sentiment, we suffer the death of a thousand cuts as the US, Europe and, ultimately, Asia come to terms with half the world operating zombie economies. Either way the message is "wait for it". The moment there is certainty, you buy.
Other 2012 implausibles:
- Australian government admits 2013 budget surplus will not be hit.
- Greece does not default on its 50 per cent of outstanding bonds.
- Barack Obama is re-elected.
- Angela Merkel smiles.
- The euro booms.
- Gold shows its colours as a store of value, rather than a speculative hedge fund-driven commodity.
- Australia's investment property market soars as buyers gear up.
- Stockbroker lists on the ASX.
- Stockbroker admits that recommending quality stocks with a high return on equity, strong free cash flow, proven management, reliable earnings streams, a strong balance sheet, high payout ratio and a proven track record is just a ploy to get an order in a bear market.
That's about it then. It's been a tough one but not that tough. Thank goodness our land abounds in nature's gifts. Where else would you rather be?
Frequently Asked Questions about this Article…
What is the 2012 market outlook and key economic forecasts everyday investors should know?
The article's 2012 outlook predicts Europe will 'muddle through' without collapse or solution, global growth will largely stagnate, the US economy will baseline but not decisively recover, and China will continue to loosen policy with modest growth risk. Interest rates are expected to remain close to zero globally and reach about 3.5% in Australia, while the Australian dollar is likely to hold at or around parity. The overriding theme is ongoing volatility driven by uncertainty over Europe.
How should investors position their portfolios during the European debt crisis and market volatility?
The article suggests a defensive stance: favour term deposits, dabble in bonds and hybrids, and buy-and-hold companies with reliable earnings and high yield (for example utilities and Telstra). Defensive stocks such as healthcare names, Ansell, Coca‑Cola and Woolworths are recommended. The piece also notes many investors will continue to hold banks. Overall: reduce exposure to highly cyclical or China-dependent resources and wait for greater certainty before aggressively buying.
Are bank shares recommended to hold through 2012 according to the article?
Yes — the article notes that investors will 'continue to hold banks' regardless of share price moves. It reflects the view that banks remain a persistent holding for many investors in this uncertain environment.
Which sectors and company types are identified as higher-risk in this outlook?
Danger areas called out include resources that rely on China, commodity plays, companies dependent on optimism or capital raisings, print media and many retailers struggling with the internet. The article warns these sectors are likely to remain exposed while global demand and sentiment stay weak.
What does the article say about corporate 'note' issues versus term deposits for everyday investors?
The article warns that some Australian companies will opportunistically issue retail 'notes' that are snapped up as proxies for term deposits. These notes are not term deposits, and the piece cautions investors to be careful — attractive yields don't remove the need for proper analysis of credit risk and structure.
What event would create the biggest buying opportunity for long-term investors?
According to the article, a European collapse would create the biggest buying opportunity in decades: after the initial shock, certainty would return and historically high yields and low price‑earnings ratios would likely be raided by long‑term investors, producing a mighty rally.
What is the alternative scenario if Europe avoids collapse and 'prints money'?
If Europe averts collapse by printing money, the article predicts a short, sharp rally in sentiment followed by prolonged weak growth — described as the 'death of a thousand cuts' — as major economies adjust to large parts of the world operating as 'zombie economies.' The takeaway is still to 'wait for it' and buy when clearer certainty emerges.
How does market pricing on risk instead of reward affect investment timing and strategy?
When markets price on risk rather than reward, movements become unpredictable because risk can change rapidly. The article says this leads long‑term investors to stay on the sidelines until the European uncertainty is resolved. The practical advice: be patient, emphasise capital preservation (term deposits, bonds, reliable high‑yield stocks) and only increase exposure once greater certainty returns.
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