Volatility the only certainty as Europe keeps stumbling
I'M READING everyone's opinion on what's going to happen next year. It's pretty blinking obvious really. The highest probability outcome for anyone professing crystal-ball abilities is to forecast current trends to continue.
I'M READING everyone's opinion on what's going to happen next year. It's pretty blinking obvious really. The highest probability outcome for anyone professing crystal-ball abilities is to forecast current trends to 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 such as healthcare, Ansell, Coca-Cola and Woolworths. Oh, and continue to hold banks because we always have and always will, whatever the share prices do.The danger areas will continue to be resources that rely on China, commodities, hope, optimism and capital raisings. Dishonourable mentions to print media and retailers struggling to meet the internet.Major Australian companies will continue to access previously unavailable billions in long-term debt through international bond issues at sub-4 per cent setting their balance sheets up 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 aren't but who's bothering to do analysis these days when a big fat yield is involved.The other certainty is that the market will continue to be volatile. Until Europe is resolved everyone will continue to focus on risk rather than reward. In a normal market reward (profits) changes gradually and predictably and a market priced on the rewards moves progressively and almost predictably without shock. A market focused on risk is not progressive or predictable because risk can change massively in short periods and this is where we are. The market is being priced on the risk of European collapse versus European solution. Until it is resolved every long-term investor is going to stay on the sidelines until this unknown is known. So any forecaster arrogant enough to call the outcome can rightly be declared more gambler than prophet.So that's 2012, the "likely" outcome. Boring stuff. The bottom line is that Europe is a huge risk and not knowing has killed interest in the sharemarket and will continue to plague it until one of two possible headlines unfold: "Europe collapses", creating the biggest buying opportunity in decades. There is a mighty rally as certainty returns and historically high yields and low PEs are raided by long-term investors. "Europe prints money, collapse averted". After a short, sharp sentiment rally 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" and the moment there is certainty, even in tragedy, that's when you buy.Other 2012 implausibles: Australian government admits 2013 budget surplus won't be hit. Greece doesn't default on other 50 per cent of outstanding bonds. Obama re-elected. Angela Merkel smiles. The euro booms. Australian investment property market soars as buyers gear up. Harvey Norman online sales rocket. Stockbroker lists on the ASX. Stockbroker admits that recommending quality stocks with high return on equity, strong free cash flow, proven management, a wide moat, reliable earnings streams, a strong balance sheet, high payout ratio and a proven record is just a ploy to get an order in a bear market.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? Happy holiday.Marcus Padley is a stockbroker with Patersons Securities and the author of stockmarket newsletter Marcus Today. For a free trial go to marcustoday.com.au. His views do not necessarily reflect the views of Patersons.
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