Predictions for 2012: investment markets
Dust off your crystal ball; the silly season is over and it's time to look at what's in store for global investment markets in 2012.
Wednesday, February 1st 2012, 6:30AM 
4 Comments
by Niko Kloeten
This year equities will outperform bonds, the Eurozone will stay together (but print lots of money) and the US economy will surprise on the upside, according to a Good Returns sample of predictions by local fund managers.
Bonds to come back to Earth
The bond market had a stellar year in 2011 but the good times may not last much longer, according to investment analyst Norman Stacey of Diversified Investment Strategies.
He also predicted a bounce-back for equities in 2012, saying history suggests share markets often follow a bad year with a good one.
Equities saw a massive outflow to bonds last year but that could soon change, he said.
"Bond markets thrived in 2011, more than making up for their losses in 2010. Against our expectations bonds proved to be the best asset class in 2011. However, a wall of bond issuance looms in 2012."
A whopping US$7.6 trillion of government bond notes will mature this year and developed world deficits will ensure a "significant new supply" will be sold, Stacey said.
"If risk aversion fades in 2012 as we expect, this recent trend of funds flow to bonds could abate and eventually reverse."
He also warned of "powerful government manipulation" of bond markets, with central banks keeping official cash rates at "extremely low" rates.
"Risks inherent in bonds should now include the prospect of possible policy change in addition to the normal ones of yield and default.
Europe to avoid disaster
Predictions of the European Union's imminent collapse are off the mark and its economy won't do as badly as feared, according to Goldman Henry senior analyst Alan Goldman.
Talk of the euro zone's woes dominated financial markets in 2011, with sovereign bond yields soaring in a number of countries as government debt levels reached crisis point.
But investors will start to display "euro zone fatigue" in 2012 while the European Central Bank will move at its own pace and political leaders will "muddle through", Goldman said.
"If a recession in the euro zone does occur, and IMF chief Christine Lagarde is of that opinion, then the recession will be short and not too deep, being isolated over only a few of the euro zone nations and not widespread throughout the region.
"An Olympic Games in London half way through 2012 should boost travel, television, entertainment, mobile technology and advertising in the region.
"Despite warnings to the contrary, Greece will not break away from the euro zone: its strategic importance to NATO, debt mountain and inability to revert to the drachma will convince Europeans that the cost of keeping Greece in the pack is less than allowing it to leave."
US growth to surprise
While Europe (or at least parts of it) will likely fall into recession, the US economy will confound the doom and gloom predictions this year, according to Pathfinder Asset Management's Market Outlook 2012.
"The most recent consensus growth view as reported by Bloomberg is 2.1% for 2012. We think we will be surprised on the upside and actual growth will be near (or even above) 3%," the report said.
"No economy has the resilience of the US, the entrepreneurial drive of the US nor the willingness to reinvent itself and drive productivity gains.
As an example, US GDP is now back above pre-GFC levels, yet job numbers are still down over 6%. That is a serious productivity gain.
"We pick unemployment to fall below 8% by year end. Currently the S&P500 has a PE ratio of just under 13x and earnings per share are expected to grow by over 10% in 2012. Is the US equity market now cheap? Probably yes!"
Pathfinder isn't alone in its prediction of US stock market success this year; Goldman has predicted the S&P 500 Index will gain 18.5% in 2012 closing by the year's end at 1,490.
What are your predictions for this year? Add your thoughts below-
Niko Kloeten can be contacted at niko@goodreturns.co.nz
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Comments from our readers
I can safely tell you that the NZ dollar will go up and down. And let's forget forward points in the equation, as that just confuses things.
I suppose you think that John Kenneth Galbraith was right when he said: "“The only function of economic forecasting is to make astrology look respectable” ?
Have some faith!
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NZD strength. We think investors who are waiting for the NZDUSD to head back toward “normal” levels may be waiting a long time. We have held a “stronger for longer” view on the NZD since 2009 and see no reason to change this. In 2012 we expect the NZDUSD to spend more time above 0.7500 than below it. And probably periods above 0.8000 as well.
This year could be very tough for investors who don't address currency risk in their portfolios.