There's cause for optimism in 2012

Contrary to negative sentiment afoot in the market, the outlook for some positive predictions made last year appears to be gaining pace.

This prevailing negativism provides a favourable background for equities since sentiment is a contrary indicator, but the fundamental forces have to be better than consensus expectations for stocks to rise. Most investors believe that the developed world is in a prolonged period of slow growth as the enormous public and private debt accumulated during the last thirty years is unwound. These investors think Europe and the United States have been living beyond their means and this problem will not be solved quickly. It is a secular condition, and while we have already endured more than a decade of disappointing investment performance, the pain is not yet over. What's more, they think, you cannot get relief by investing in the developing world because economies there are suffering from high inflation and slowing exports. In addition, China may have real estate and bank loan problems that will make investing there treacherous. The democracies of the West appear to have dysfunctional governments which are incapable of solving the problems facing their economies. Europe and the United States must engage in some form of austerity program to deal effectively with their financial difficulties, since we can no longer count on "growing our way out of this mess.”

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