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Bright side

The team and myself are delighted to reveal that our collective resolution is to focus as much on the positives as the negatives in financial markets and the economy in 2012. With a positive mindset, we are asking whether the market moves higher can last? Possibly, rather than probably, would be our view.

The starting point for 2012 is that the global economy is growing and unless confidence dissipates totally in the early part of the year, we do not envisage the re-emergence of a global recession. Confirmation that a global recession has been avoided should help support asset markets but while asset class returns could be positive, we feel our mediumterm view of sub-average returns from risky assets remains likely.

Equity valuations, particularly those of the very biggest companies, are reasonable and allow room for positive returns as long as investor confidence is not buffeted by gales on both sides of the Atlantic. We are continuing to focus on companies and investments where we can see sustainable profit growth and dependability of business models.

Broadly, we expect the overall investment environment to remain volatile and unpredictable but we strongly believe that volatility can breed opportunity. For choice, we prefer the long-term growth story in emerging-market economies and the recovery potential of the Japanese equity market.

At this time, many financial markets are being either covertly, or openly, distorted through the manipulating hand of central bankers and politicians. This is leading to distrust among many investors but such scepticism might prove to be healthy for patient investors if faith is finally rebuilt in the waning “cult of equity”, resulting in a re-rating of equities.

Last year was incredibly challenging for investors. While 2008 was dreadful in asset markets, 2011 was a never-ending rollercoaster of extreme volatility. The difficulty was unpredictability and one would have struggled to have imagined such a treacherous course. On the balance of probabilities, surely 2012 has to be easier, or are we being too optimistic?

Very few people are suggesting that this year could mimic 2011. Our central case is that small overall positive returns are likely. Our forecasts could be wrong both to the upside, in the event of a powerful recovery, or the downside, if a new recession did happen. The greatest positive surprise could come from the recent improvement in the US, the avoidance of a lengthy recession in Europe and confirmation that a soft landing has been engineered in the Chinese economy.

If all three occur simultaneously, then 2012 could be a cracking year for investment returns. Without wanting to finish our optimistic opening shot of the year on a down note, the downside risk to the economy and financial markets is a lack of conviction that European governments will be able to roll over the €450bn worth of debt maturing in the coming three months, without causing further turbulence to the fragile European financial system. This and many other questions remain but we are looking on the bright side of life and will try to maintain our resolution, at least until February.

Tom Becket is manager of the PSigma dynamic multi-asset fund


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