Markets were fixated by shortterm events in 2011, creating significant stockmarket volatility. We believe that for those investors prepared to take a longerterm investment, this creates some potentially attractive opportunities for 2012 and beyond.
Amid the uncertainty, many investors flocked to “safe havens”. As a result, the gold price reached record highs and core government bond yields collapsed to the lowest levels for a generation, putting them in a position where returns were negative when inflation was taken intoaccount. Based on this, we believe equities offer some of the best value in 2012, even though shortterm performance is likely to remain volatile but investors should remember that many firms are in solid financial shape, with many having put in place their own costcutting measures.
We feel economic growth is likely to remain under pressure this year and we continue to see stronger growth from global emerging markets in 2012 in comparison with the developed world, albeit that the rate of growth may slow somewhat compared with recent history.
While many European companies have robust finances, a lack of confidence has put them off investing. But we feel this ignores two key positive factors – first, many companies based in the Western world are increasingly benefiting from profits in emerging markets and, second, while the macro outlook for developed markets may continue to be difficult, emerging market equities look set to benefit from a much more supportive economic environment.
We believe as emerging markets continue to grow, there will be greater spending on domestic infrastructure as urbanisation takes place. This, when coupled with an increase in personal wealth, should lead to higher levels of domestic consumption and these positive trends should increasingly make emerging markets the guardians of their own destiny. This should benefit commodities and property, with both supported by high inflation.
Such powerful drivers, coupled with factors such as more robust fiscal positions than the West, also underpin our longerterm, positive views on emerging market equities.
We are positive towards the outlook for oil and hard commodities in general and as such we favour Russian equities, where we see supportive fundamentals while equity valuations are also low versus their historic average although political risk remains a source of market volatility.
Equities are also attractively valued in Latin America on a price to earnings multiple of around nine times 2012 earnings. At the macro level, many countries in the region are in better shape than developed markets, with higher levels of consumer confidence and solid fiscal accounts. In the event of a prolonged downturn, these economies have tools at their disposal to deal with it, with ample room to reduce interest rates to stimulate the economy, for example.
Looking at the exportheavy Asian countries, the global slowdown has clearly had an impact but we view the backdrop favourably, with economies offering stronger growth than the West.
Inflation is showing signs of moderating and looser fiscal policies could help increase consumer demand. Within Asia, we favour Chinese equities, where we believe valuations are currently attractive.
The market is trading on about eight times 2012 earnings. Rapid rises in residential real estate prices could reverse and become destabilising to parts of the economy but we believe that a soft landing is the most likely outcome.
Alec Letchfield is chief investment officer, wealth, at HSBC Global Asset Management (UK)