A look back at 2011, and a peek at the year ahead
Tom Elliott examines the reasons behind the economic uncertainty and lack of growth in 2011, and explores the outlook for 2012.
2011 – a year marked by volatility and uncertainty
Investors had a difficult year in 2011. With stubbornly high inflation in the eurozone, the UK and the US, worrying global economic developments and volatile stock markets, it has been difficult for investors to achieve attractive returns. The FTSE 100 was down 5.6% (Bloomberg, 30 December 2011).
Global growth has been steadily revised down, from what were in any case modest initial projections. The eurozone debt crisis reached a level where some fear the sustainability of the euro itself is under threat. Across the Atlantic, the US is still the world’s largest economy but it may be hampered by a serious long-term unemployment problem.
Knock-on effects
An earthquake and tsunami devastated Japan in March and as well as the tragic human toll, a subsequent nuclear power plant explosion further disrupted output in the world’s third largest economy. The knock-on effects affected supplies around the world, particularly in the auto and technology sectors. These factors were the driving forces behind the fall in growth expectations seen in 2011, particularly in the second half of the year, which in turn led to a lowering of company profit growth estimates.
Problems in the banking sector persisted. The reluctance of some European and US banks to lend to small and medium sized companies (which provide the bulk of employment growth within the developed world) again contributed to the disappointing growth in these regions.
Banks bear the brunt of the sell-off
Looking closer at stock markets, it’s not surprising that financial shares were the weakest on global markets – although there were opportunities for nimble investors to take advantage of rallies and selloffs. However, for the year as a whole, there were relatively slight losses from companies that provide consumer staples (food & drink, household products) and healthcare.
Stock markets also fell in emerging markets. Although growth in China, Brazil, India and Russia was stronger than in the developed world, their companies were affected because many emerging economy central banks had to raise interest rates to combat inflation. GDP growth forecasts were also downgraded due to weaker growth in developed economies.
2012 outlook – more of the same or fresh hope?
At least one key event that troubled markets in 2011 will almost certainly continue to reverberate in 2012: the eurozone debt crisis. Even if a definitive solution is soon found, the economic damage has been done and all the countries in Europe will suffer lower growth because of it. The UK economy will also be hit by weak global growth and won’t be able to rely on exports to offset fragile domestic conditions.
Outside of Europe the outlook is a bit brighter. In the run-up to the US election, it is likely that the government will try and pursue policies that encourage economic growth. Meanwhile, Japan should continue to recover from the earthquake and tsunami. Elsewhere in Asia, economic growth will inevitably slow as trade with Europe drops, but this growth will still outstrip any other region of the world. Latin America’s commodity exports to China will continue and rising domestic demand will benefit both Brazil and Mexico.
With safe havens constrained, where can investors turn?
The eurozone crisis is likely to keep investors wary but many traditional safe haven options currently offer little potential return. Developed world government bond yields are well below what is considered reasonable and the price of gold is at risk because of a potential escalation in the eurozone crisis and the prospect of a stronger dollar.
We believe that the investments that offer the best potential return over the next year include higher yield bonds such as emerging market government bonds and high yield bonds from companies. Shares should recover some of their losses from 2011 as the outlook in Europe improves and they appear attractively valued. However, company profit growth will be hard to come by, moderating gains. Companies that offer higher dividend yields may appeal to investors who would like an additional cushion when investing in the stock market.