(We originally published our view of the Outlook for 2012 on our blogspot site. With the market developing fairly much as we had forecast, we thought the few items that may have either been ‘compressed’ or ‘delayed’ should be updated. Refer the ‘Editor’ notes below.We would be interested to read your comments – as would our readers – and invite you to add to the discussion through Comments below.)
What is the outlook for the 2012 calendar year?
The ‘markets’ are looking volatile no matter which asset class is being considered: let’s break them down –
Regionally (Australia; USA; Europe; Emerging Markets; Asia); and by..
Asset type (Cash/ Fixed Interest; Equities – Global and Domestic; Property – Global and Domestic; Commodities; Alternatives)
The recent history of the All Ords index performance is confusing when contemplated against government rhetoric: 2009 rose by 23.4%; 2010 rose by 8.3%; 2011 fell by 15.9%. The Australian economy, being heavily resource-export dependant, is going to be affected by the fortunes of the economies of our trading partners – Asia more particularly, but globally to North America and Europe as well. There is little doubt that this is going to be a tough year: the RBA has signalled this with its outlooks as it reduced official interest rates late in 2011 (and is expected to follow this up with further cuts over the coming months). [(May 2012): a ‘shock’ 50 basis point drop earlier this month is widely anticipated to be followed by further cuts during this calendar year. We lean towards the broadly-held view that the cuts could extend a further 75 basis points before this round is finished. Editor.]
Banks are expected to come under some pressure during the year, with lending being tight, their borrowing costs from foreign sources increased – and the effects of the high Australian dollar on exports having ‘dampening’ consequences. For similar reasons, manufacturers continue to be a concern; miners will have to contend with increasing supply and (short-term at least) diminishing demand; unemployment is forecast to rise – even though staying at modest levels; and retailers will face increasing competition from online selling and pricing ‘dis-inflation’.
Whilst we are not going to give a forecast as to performance we believe that the Australian share market will experience a ‘choppy’ ride for most of 2012 – and won’t be surprised if there is at least one ‘correction’ in share values in the first half of the year (i.e., falls of at least 5%). [(May 2012): The All Ords fell during April and the first half of May, by more than the 5% mentioned – and with the election cycle in Europe not delivering clear mandates, expect more market volatility albeit with some marginal upwards trending. Editor.]
In spite of the headwinds mentioned above, we are of a view that the fundamentals of our economy internally should stay reasonably sound and, given the fall on the market for 2011, there is potential for [a] (some) recovery of those losses during 2012.
From a property perspective, it has been reported that the gap between demand and the available supply is continuing to grow and provided credit funds become available for home buyers, there is potential for there to be a reversal of the recent downwards trend in most of the capital cities. [(May 2012): With credit markets remaining unsettled because of the ‘European situation’ there is now a higher expectation of continuing downward pressure on home prices for much of this calendar year. Editor.]
The USA –
This year is one of that is very difficult to predict: each four years the Americans go through the election cycle and 2012 is a Presidential election year. Will Barack Obama successfully retain the Presidency? ..or, Will the voters who register and vote, choose a more conservative President (from amongst the Republicans)? [(May 2012): Mitt Romney seems to be the candidate nominee for the contest. Editor.]
Whichever outcome is chosen, there is little doubt that the US economy has a huge workload in front of it, needing to –
Reduce the national debt;
Reduce the rate of home loan foreclosures; and
Increase the sense of well-being amongst its citizenry!
From the financial markets’ perspective, the US economy has to look in multiple directions at the one time and decipher the flow of information correctly so as to make the appropriate decisions in relation to business operations, economic stimulus and market transactions: they are the ‘go to’ economy and have to absorb the events of the European turbulence, Chinese economic and trade decisions, Emerging Market activity, ‘the oil trade’ (and other commodities – including Gold, grains etc) – and the level of confidence of their own consumers.
Given all of these influences, we will not be surprised to see a continuation of turbulence in market valuations – particularly in the first half of the year – but expect there to be a steady improvement in market valuations over the whole year. [(May2012): Whilst it is not in this calendar year, the consequences of political inaction this year is expected to see a significant financial event early in 2013 that will cause a somewhat substantial downturn in market values on Wall Street. The newly elected US Administration will need to take prompt and decisive action to avoid this event. Editor.]
Since our minds [have been turned] to ‘the elephant in the room’ [since] mid-2011, we [are] satisfied that the information we received [will] be the likely scenario to play out: that there will be a resolution to ‘the debt crisis’, that the European Community will probably remain intact and that once the funding of the debt crisis is resolved, there will be steady improvement in the European economies generally – and a waning of the turbulence arising from the concerns about that region.
For 2012 we accept that there is likely to be restraint in the growth figures with the strong possibility that there will be recessionary conditions for at least the first two quarters of the year. [(May 2012): the political uncertainty in Europe as mentioned in an editorial insert above, now suggests to us that the risk of the EuroZone remaining recessionary for most of 2012 is high. Global growth will be restrained on this account. Editor.]
Whilst Europe has diminished as a trading partner for Australia, the oscillations in their economies will reverberate around the globe and it is likely that we will experience some consequences of their situation – particularly in the banking sector, with higher borrowing costs encountered by our banks as a consequence of the ‘ratings’ of some of the institutions from whom they borrow – and reflecting in more difficult borrowing conditions for Australian borrowers.
Again we see this area of the globe recording turbulence for the first two, maybe three quarters of 2012 before settling into a stable slightly improving market scenario into the end of the year. [(May 2012): for reasons stated in the above editorial note, we now expect that it could take until the second quarter of 2013 before reasonable growth trends will be recorded. Editor.]
Emerging Markets (EMs)
In this scenario we are including the BRIC economies (of Brazil, Russia, India and China) as well as the other Asian, South American and African economies that can be considered ‘emerging’ towards developed economy status. In very broad terms, these are economies whose financial progress is based on natural resources (mainly minerals), agriculture and ‘cheaper’ labour. They usually have low numbers of ‘middle class’ citizens, but many aspiring to that status.
Because the economies of many of the EMs are very dependent on their trading opportunities with the developed economies particularly of North America and Europe, their fortunes are often a magnification of any directions taken in those economies.
Mineral resources have a significant time-lag from ‘proving’ of existence through to extraction and transport to end-user: unfortunately for these economies, periods of high demand (and accompanying high prices) are often accompanied by volatility in market prices just at critical points in time of the development cycle. (E.g., after taking several years to develop the infrastructure and establish markets, the product can either come on line during a significant downturn – or, be interrupted because of such an event.]
Whilst these are difficult markets to form a strong view about in a broad sense, we are of the view that the scorecard for 2012 is not going to make for attractive reading come next January for the EMs. [(May 2012): since making the above comment the performance of the advanced economies has been more subdued: in relative terms, the EM report card may not now look so disappointing for this year. Editor.]
Whilst Asia is included in the general grouping for the EMs discussed above, the outlook for these economies is considered to be better than for the broader group of EMs. Japan has an ongoing difficulty, but is a very strong economy – something of an ‘underpinning’ of the debt and financial market struggles – and we are comfortable that there should not be any ‘shocks’ from that quarter (excluding of course the potential for there to be further natural disasters that could give rise to economic concerns).
Most of ‘mainland Asia’ – and Indonesia – are perceived as continuing to improve their capacity to maintain a growing economy on the basis of domestic consumption: whilst this is still in very early stages of progress in some of those economies, it is happening and should buffer some of the global economic volatility.
We are of the view that Asia will be a volatile market place for a few years yet, but that it will put on growth during 2012 whilst being able to take advantage of price (cost) restraint as the other markets around the world experience their volatility – particularly during Q1 and Q2. [(May 2012): ..and now probably through for the balance of the year as well. Editor.]
In the light of these expectations we will be looking to manage portfolios in accordance with the individual strategies developed with our clients: this does not preclude that we could counsel some of our clients to take short-term tactical measures to protect the ability to achieve longer-term goals they have set.
In particular we will be reviewing the ‘level’ of defensives held in client portfolios and, subject to the particular circumstances, may recommend some changes that will further shockproof their investments, protecting against any ‘need’ to sell invested assets at ‘the wrong time’ – and facilitating a progressive re-entry to the ‘riskier’ assets as the level of confidence is restored. [(May 2012): This strategy is being maintained, with an increasing number of clients being restructured as these conditions persist. Editor.]
Assets type Outlook:
The particular assets we will consider herein are as follows: Cash/ Fixed Interest; Equities – Global and Domestic; Property – Global and Domestic; Commodities; and Alternatives.
‘Cash is King’ they say: but we need to be mindful that the value of the Cash is vulnerable to political and economic decisions and activity. Cash will be eroded in purchasing power when inflation rises; and when Central Banks print more of ‘the stuff’ (and of course, to some extent these two propositions go ‘hand in hand’). Our outlook for Cash for 2012 is that it will lose some of its purchasing power – and that it will return a lower income to the investor.
Fixed Interest includes sovereign and corporate bonds – and behaves very much like Cash except in periods of high volatility and high equity values (amongst other scenarios). Under the influence of the Euro Zone ‘work-out’ we are of the view that this will be an investment area in which you will be best advised to work with an experienced and trusted Fixed Interest manager. Whilst returns may well decline during 2012 it is not inconceivable that there could be some capital growth for this sector, particularly amongst the ‘blue chip corporates’.
Equities can be looked at in a number of ways: capital growth, capital stability and from an income perspective to name a few. Given the outlook expressed for the various regions of the world in the geographical commentary above, we believe that this will be a year in which there will be growth by year-end – but that it may be ‘safer’ to leave the entry to the markets (where not already invested), until late in Q2/ 2012 – and then progressively investing through the end of the year (and beyond?). [(May 2012): For reasons expressed earlier in this post, it is more obvious now that investors need to work closely with their advisers in determining entry/ exit points – but more importantly, strategic wealth/ asset management. Editor.]
Property is an interesting asset class and one that has been particularly negatively impacted through the still-healing Global Financial Crisis (GFC). There is a view that ‘pent-up demand’ is not being met and that the lack of supply of residential accommodation in particular is likely to bring some upward momentum to this market in Australia, the UK and in the US. Commercial property is also likely to benefit as economic conditions improve – but perhaps not strongly until 2013 (and who wants to be the ‘early mover’?).
Commodities, whether hard, soft or otherwise must respond to shorter-term supply and demand factors – because of storage, transport and/ or ‘perishablility’ issues – but in a world where there is an ever-increasing population that requires facilities, food and warmth, there is no doubt that the demand-side is likely to force prices up over time. We believe the volatility will stay a feature of this asset class.
Alternative assets include infrastructure and other investments (such as derivatives of share transactions). Because of their nature, we are of a view that their markets too will be quite volatile during 2012 – but potentially setting up for a strong period of growth in the years beyond.
The markets whether taken regionally or by asset class are still in a process of recovery (or healing) from the GFC of 2008: similarly to most healing processes, time is important – and without singular attention to the process (and control over it), is subject to setbacks that need to be corrected. We anticipate that 2012 will continue the process with further recovery evident, with some turmoil particularly in the first half of the year, but with a more positive view by year’s end.
In spite of our outlook we are conscious that investors remain nervous about committing substantial amounts into the traditional investment markets other than Cash. We remind our readers that there are two matters to resolve when considering the financial future: the strategy that will help you achieve those financial goals; and the products (financial assets) you invest into.
The Value of Advice to clients of financial planners lies in how well those two components are melded together. In the markets prevailing at this time (and since early 2008), it is prudent to review your goals to ensure that the strategy you accepted in developing your financial plan is still relevant; and to accept that there are times in the investment process when the prudent action is to ‘stay put’ – even if reasonably fully invested in risk assets.
Financial planners have no control over the financial markets; and they are not able to forecast what instant reaction will follow some computer algorhythm that crawls over printed documents seeking particular words and responding to them with a Sell or Buy order! Nor can they predict when some geopolitical event might erupt in a disruptive way for the financial markets. However in the main, they can work with you over the relevant timeframe to see all of these events through in a way that should meet the longer-term goals that they have discussed with you and helped you to express in your own way.
Continuum Financial Planners has a number of experienced advisers available to work with you to consider your goals and aspirations – or to review your existing strategy (and investment portfolio) – to ensure you are headed in the right direction, towards financial independence: call us on 07 3421 3456; or use our online facility to Contact Us to set up a meeting. (For prospective new clients the first meeting is at no cost; and obligation free!)