The current Global View investment outlook for 2012 published by Bank Sarasin expects setbacks towards the end of 2012.
“Setbacks are expected to re-emerge as the economy continues its zigzag course. Despite quantitative easing, interest rates on the long end in industrialised countries should increase. Provided no political mistakes are made, risk aversion on the currency, bond and equity markets is expected to decrease,” it said.
However, analysts at Bank Sarasin believe that several years will pass before a longer-term, structural bull market develops. Bank Sarasin therefore advises investors to focus on short-term cycles. Bank Sarasin’s favourite stocks in 2012 include Intertek (testing services), Kingfisher (home improvement chain), Mobimo, Pirelli, Roche, SAP, Swatch Group und Swiss Re.
Given the need for global deleveraging, the world economy still faces some major challenges at the beginning of 2012. It is possible to cut debt if policymakers keep interest rates below growth rates. Insufficient growth in public expenditure and consumption in the industrialized countries should be offset by investments and exports in emerging countries. Emerging market demand in 2012 should be supported by quantitative easing. As global leading indicators already point to a fresh upswing, growth should spring some positive surprises in the first half of the year.
The greatest risk is that the euro debt crisis could become a stumbling block for the global economy due to political mistakes. If there were a credit crunch in the Euroland, it would spread to other regions via the interlinked global financial system. However, Bank Sarasin believes this worst-case scenario is a low-probability event. On the other hand, given the escalation on the euro bond markets, Bank Sarasin expects politicians will already introduce far-reaching measures to promote the recovery of the Euroland in the first quarter of 2012. This should pave the way for the European economy to return to a growth path from the second quarter onwards.
“Despite the euro crisis, there are now increasing signs that the economy in the USA is starting to recover after a bad patch in summer 2011. A cyclical upswing is approaching that will also pull Europe along with it,” Jan Amrit Poser, Head of Research and Chief Economist at Bank Sarasin, said.
“Shorter economic cycles and harder landings pose huge challenges for investors. As the correlations between different assets classes increase noticeably in difficult market phases, investors should monitor the risks carefully and reduce their positions in good time. After a positive first half of the year with double-digit returns, we expect fresh setbacks to emerge towards the end of the year. But overall in 2012, investors should achieve a very positive performance with a mixed portfolio,” Philipp E. Baertschi, Chief Strategist at Bank Sarasin, said.
Policymakers in the industrialised countries will continue to relax monetary policy in 2012. Emerging market countries may also be prepared to relax their monetary policy more sharply. Despite monetary expansion, Bank Sarasin expects interest rates on the long end to increase in industrialised countries. The yield curve is likely to get steeper in industrialised countries due to the gradual economic upswing and slow rise in inflation expectations. If risk aversion subsides, AAA-rated government bonds – so-called safe havens – would be hit particularly hard. The emerging market bonds of companies with solid fundamentals that are supported by a more expansive central bank monetary policy stand to profit in 2012. Corporate bonds have an attractive valuation because credit spreads are well above the long-term average. Also, negative net new bond issues of banks and low-level new borrowings for industrial debtors make bonds with a high yield a scarce resource. After a round of recapitalisations, the financial sector should also become more attractive again as the year progresses.
Weaker fundamental data in the Euroland require decisive measures from the European Central Bank at the beginning of 2012, which will weaken the euro against the US dollar. Although the Swiss National Bank (SNB) will defend the lower limit for the EUR/CHF exchange rate, it will not raise it any further in 2012. The Swiss franc is likely to gradually return to its fair value without any assistance from the SNB, based on Bank Sarasin’s assumption of a slow improvement in economic conditions. The USA’s structural problems will move back into the spotlight once the Euroland emerges from its recession from the second quarter onwards. Demand for the defensive Japanese yen is likely to subside, while cyclical currencies should receive support.
Over the next five to ten years, equities are unlikely to generate heady returns owing to the lacklustre growth rates in industrialised countries. This makes it even more important to recognise above-average return phases, which are primarily determined by positive changes in growth expectations, and avoid market corrections.
Since equity prices mostly declined in 2011, despite the rise in earnings, many equity markets are now very inexpensive. Bank Sarasin considers the emerging markets to be the most undervalued region, offering the greatest upside potential in 2012. Euroland equities, which are much cheaper than US equities and are currently shunned by investors, also have the potential to spring positive surprises.
Shorter economic cycles force investors to adopt a more flexible approach to sector allocation. Besides long-term investment themes such as healthcare, energy and technology, which guarantee portfolio growth and income, investor should focus on cyclical sectors that directly profit from growth in emerging market countries during the upswing in 2012.