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Certain uncertainty

We currently live in a bi-polar world. Investors are faced with a myriad of dichotomies dictating any number of outcomes. Prominent conundrums facing asset allocators in 2012 include the tugs of war between inflation and deflation, anaemic growth and recession and deleveraging and quantitative easing. The “certainty” v “uncertainty” dilemma pervades the whole 2012 investment landscape. Against such a backdrop, we try to take a step back and build our outlook around the “certainties” we know and endeavour to take a proactive approach to the uncertainties.

What do we know for certain about 2012? A hiatus of sovereign debt refinancing looms in the first half of the year, with France, Italy and Spain at the front of the queue. European financial system solvency fears will remain centre stage and investors should be cautious.

Improving US economic data is pointing to a US economy that is tentatively recovering. House sales appear to have stabilised and recent job creation has been better than expected. All this is welcome news but US growth could be inadvertently derailed by US$1.2tn of automatic spending cuts after Congress’ super-committee’s failure to agree on new measures on how to cut the country’s US$1.3tn deficit.

It is almost inevitable that market volatility will be rife in 2012, with a multitude of random triggers littering the year. Such triggers will not just be economic or earnings related but also geo-political. Geo-politics, in our view, will take centre stage. Both the US and EU appear to have Iran’s nuclear programme high on their agenda. On the political front, surprises are also likely, with prospective elections taking place in the US, France, Greece and Russia.

Look hard enough, however, and certainties can be found. The growth of the middle class in developing countries driven by wage growth, improving education and urbanisation are just some. Consumerism and infrastructure, their natural bedfellows, are another. Discipline is required to ignore short-term noise. Instead, investors should concentrate on the powerful forces that have been unleashed by globalisation and rising personal wealth in developing markets. Specific asset classes will benefit from these secular forces. Equities deriving earnings from staple and white goods, energy production, infrastructure and luxury goods are well placed to benefit. Price volatility will naturally be a feature but herein lies the opportunity.

On the commodity front, oil and copper supply will remain constrained and be priced accordingly. Urbanisation and infrastructure build will underpin their pricing. It is also clear that investment cycles will become shorter as markets react to events over the year.

Investors should be positioned with a bias, where possible, towards yield-generating assets offering bankable returns but at the same time continuing to have exposure to those asset classes that reflect the powerful secular trends that will shape the world in the next 10 years and not just today.

Simon Callow is manager of the CF Midas balance growth fund


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