December 2011
Not out of the woods yet…
2011 will be remembered in the financial markets as one of the most volatile years in recent history. In particular, the intensification of the eurozone sovereign debt crisis and the continued fallout from the 2009 financial meltdown engendered an investment environment characterised by wild swings in the prices of securities.
While many investors would like to see the back of 2011, the root causes of its volatility will likely remain well into 2012 and perhaps beyond. For Europe, a period of necessary austerity, to varying degrees among the nations concerned, is in order. Deleveraging (i.e. reducing debt) will be the watchword in 2012, not only in the eurozone, but also for other European cashstrapped economies such as the UK. Policymakers must walk a tightrope, looking for ways to cut unsustainable debt levels without plunging the region into a deep recession. This is a daunting task, and the economic impact will most probably be conditioned by the speed and depth with which debt-reducing measures are implemented. The overall policy response may therefore be one of administering the medicine gradually and carefully, rather than applying a short, sharp shock that may kill the patient. But however leaders react, the inescapable conclusion is that Europe’s short-to-medium term growth prospects are anything but sanguine.
Deleveraging will also be a major feature in the US next year, primarily concerning consumer indebtedness. Much remains to be done, but, given the Obama administration’s relative inability to enact legislation, due its lack of a lower-house majority, little can be hoped for in terms of effective government action to help relieve the overburdened consumer prior to next November’s presidential elections, before which a general policy paralysis can be expected. Nevertheless, recent data releases show that the US economy is finally making some tentative progress, although it is far too soon to talk of a sustainable economic recovery.
…but there are clearings…
In 2012, those seeking growth assurances must turn to the emerging markets, and to Asia in particular. Few analysts now doubt that China will soon become the world’s largest economy, replacing the US. Long regarded as inevitable, the realisation of this development has been hastened by the crisis-induced depth of the US recession and extended expectations for any recovery there. China does not share the debt woes of western nations, and has only been indirectly impacted by the US slowdown (although the US’ major creditor, China’s seemingly insatiable domestic demand has diminished the earlier importance of exports to the US). Rather, China’s problem in recent years has been potential economic overheating and the high inflation that might accompany it. If China can contain inflation without significant damage to growth prospects - and there are signs that this may indeed be happening – then the largest obstacle to its attractions for investors will have effectively been removed.
… and some bright spots
Despite the fragmentary economic backdrop, there will still be investment opportunities in 2012. For example, in contrast with the solvency concerns variously besetting certain states, banks and consumers, there are a surprisingly large number of non-financial companies internationally that have solid balance sheets with little, or no, debt. Given next year’s generally uncertain outlook for stock markets, the fixed income securities of such companies may well see some investor interest, due to the solid fundamentals of the issuers and a lower risk level than equities.
