Looking Ahead to 2012
Happy New Year! And this will be about as cheery as we will be as we take a moment to take a quick look at investing in 2011 and more importantly in 2012.
2011 proved to be another challenging year as economies, plagued by debt, continued stress on real estate markets, low production, tight credit, etc. ended up yielding little to negative returns. The S&P 500 returned just over 2% for 2011 including dividends. This return was earned with a lot of anxiety as investors witnessed a lot of volatility throughout the year (not to mention those that decided to invest abroad as several international markets have been in a bear market since 2010). For those that chose to stay away from the anxiety of equity investing yet still seeking returns, fixed income instruments did not yield much better as a whole. The safer-haven type of debt did well while the higher yielding bonds for the most part underperformed.
So here we are in 2012, a political year, with European markets struggling, unemployment barely moving, baby boomers looking to retire, interest rates at historic lows and folks wondering how they will earn money on their investment portfolios.
We hate to say that due to all of the above conditions, 2012 will prove to be yet another challenging year for investors. Historically, election years, where the incumbent has a good chance of losing, have proven to be very challenging years in the U.S. equity markets due to the inherent uncertainties. Add to that the global fiscal pressures in the US and European economies and the increasing real estate and leveraging patterns developing in the emerging markets, resemblant of the US economy before the bubble burst, and we are looking at a challenging year, especially for those seeking immediate income or return from their portfolios.
In the US, we are experiencing a secular bear market (a long-term stagnating trend that historically has averaged 13-16 years, consisting of sharp up and down trends in between but with negative to flat returns from beginning to end). Since 2000, the S&P 500 is basically flat point to point. However, while dull in ultimate return, the investing experience during these years has been quite nerve racking as we have witnessed extreme volatility throughout. This is expected to continue for another 1-2 years if history repeats itself.
Global economies are faced with fiscal issues as increased spending along with insufficient revenues has led to increasing deficits. While the problem seems fundamental to fix (decrease spending and increase revenues), political interests make it difficult to pass laws to change these patterns as someone is ultimately affected with such behavior changes (where does the government cut?).
Emerging markets are witnessing different challenges. Economies such as Brazil, China and India are following the trend established in the US a few years ago. Consumer debt is rising, real estate is booming, showing unsustainable double digit growth rates, all supported by looser institutional credit standards. This has created a euphoric consumer similar to the U.S. in 2007. In the meantime, their equity markets have been in a bear market since 2010, some showing drops of over 30%. The combination of these elements will surely lead to the busting of the existing economic bubble as occurred in the US and other Global economies in 2008.
So as we have just listed several challenges facing investors in 2012…what would be our strategy moving forward?
As has been the case historically, buy and hold is not effective during secular bear markets as you can hold on to a market for 13 years and end up with little to no return. Such markets warrant a more proactive approach to investing where economic, fundamental and technical indicators are considered in order to pick and choose the appropriate defensive sectors and know when cash is the best place to be. While we agree that perfect market timing is impossible, market trends do occur and repeat themselves. Knowing and understanding these trends, whether investing for long term returns or immediate income, enhances the odds of holding an effective portfolio.
As such, Allgen’s focus in 2012 will be on preserving portfolio values by managing all of the above mentioned risk, holding high levels of cash, safe haven assets and non-cyclical assets when appropriate in order to avoid major losses when markets drop and conversely positioning assets for what we believe will be a strong post secular bear market run. Historically, the markets have produced double digit returns for an extended time period following secular bear markets. As such, proper positioning and timing of market reintegration will prove to be of great value for our client’s portfolios into the extended future.
Investing for income in this low interest rate environment will require specific strategies to balance the management of interest rate sensitivity risk, economic risk, credit and market risk with the need for increased returns and higher yields. Rather than relying solely on bonds for income there is a need to look at other avenues such as high dividend yielding, stable, non-cyclical stocks that have a long term record of increasing dividend payouts.
Although these types of markets are very challenging, history has shown that those who persevere come out on the other side stronger and well positioned for the prosperous times that follow. We are excited to continue to overcome such market environment challenges with diligent market monitoring, positioning and purposeful client communication.
Have a great 2012!
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