2012: Investment market hinges on eurozone solution
With politicians still trying to get to grips with the euro crisis and low UK growth predictions, investors could be in for another bumpy ride in 2012.
Last year, the FTSE 100 saw a high of 6,091 and a low of 4,944. With such volatility, safe havens like gilts and gold have thrived. Fund managers and advisers believe the ups and downs are set to continue.
Ninety-six per cent of managers expect 2012 to be volatile, according to a survey conducted by the Association of Investment Companies.
Managers are still positive, although less optimistic than last year, with 71 per cent believing markets will rise compared with 92 per cent the previous year.
Yellowtail Financial Planning managing director Dennis Hall predicts swings between a range of around 5,000 to 5,600.
He says: “The biggest milestone in the investment sector will be the agreement and follow-through of the EU countries in dealing with the euro crisis. With a resolution, the FTSE will climb above the 5,600 level but my view is we will go through 2012 with a resolution that needs to be constantly reworked, so the year will end with the FTSE broadly level with this year.”
Hall says he expects capital preservation to remain the priority and quality, short- duration sovereign debt will be popular.
Williams De Broe head of research Jim Wood-Smith disagrees with avoiding risky assets amid volatility.
He says: “In order for portfolios to provide returns that are more than paltry, investors must take on greater risk at a time when the volatility of equity markets is highly likely to become ever greater.”
But he sounds a warning on European markets, saying: “Next year will show whether the eurozone will survive or collapse in ignominy. It is our expectation that out of the different markets, the European market will demonstrate the greatest volatility in 2012 and therefore have the biggest potential for losses.”
Evolve Financial Planning director Jason Witcombe (pictured) thinks investors will be cautious with the eurozone crisis and sentiment will not improve until a stable resolution is in place.
“What will sell well next year is probably cash or something with cautious in its title,” he says.
He believes diversification will be key and that investors should think of the long term. He says: “Investors should not try to time markets. I would encourage investors to put together a diversified portfolio across a number of asset classes and stick with this through the good times and the bad.”
Jonathan Davis Wealth Management managing director Jonathan Davis expects the euro to fall next year, leading to appreciation in the dollar and falls in commodities and equities.
He says: “I think either the EU recession will be sufficient to bring down the value of the euro or the Germans will relent and allow the European Central Bank to print money. The value of euro is going down whatever happens.”
He suggests gilts will rise in the short term if there is a collapse in other asset classes but warns they could face longer-term problems. He says: “I expect in the next year or two, gilts will have their last burst for glory and then start a multi-decade decline after a multi-decade rise, with long-term rising inflation. The UK is printing money to bail out the banks and that is creating long-term inflation.”
This time next year, Davis expects markets to be significantly lower than they are today but Values to Vision Financial Planning director Nick Lincoln considers markets have already priced in a large amount of bad news.
He says: “Next year, the euro situation will come to a conclusion, which may be Greece, Spain, Portugal leaving the euro and that will be good for stabilising markets. Markets have been volatile because they are nervous and need a conclusion, so there is potential for upside in equities, as they are pricing in a complete collapse of the euro.”
Hargreaves Lansdown senior analyst Meera Patel (pictured) backs the view that everything hinges on a resolution in the eurozone.
Patel says: “If the eurozone problems are resolved in the first half of 2012, then we may well see a recovery in the second half, in which case, I would expect markets to be up. If we experience much of the same kind of volatility as this year, then markets may well be flat or even down.
“If you are bullish, then it is likely that higher-risk assets will perform such as commodities and emerging markets.
“If you are bearish, then absolute return funds should hold their own, gilts may stay well supported and the defensive equities should prove resilient.
Patel is hedging her bets. “I am inclined to have some risk in case there is a recovery but also maintain some caution favouring fund managers who have shown an ability to protect in down markets, such as Invesco Perpetual’s Neil Woodford and Trojan.”