2012 Global Market Outlook
Anticipating another year of volatile markets, BNY Mellon’s investment professionals have presented their views on areas of opportunities and potential downside risks in the 2012 Global Market Outlook report.
As 2012 started with almost two years of a mounting European sovereign debt crisis and the contagion passing from Greece to Ireland, on to Portugal, and back to Greece, the global market outlook for the year appears not only skeptical and alarmed, but also optimistic. This is because, each of these countries was forced to accept a loss of market access and help from external authorities.
In this context, the report has reviewed the fundamental change in European policymaking towards radical reforms. This hard-line approach is evident in each move being made by the European Financial Stability Facility.
Interestingly, the reforms have raised a sense of optimism to the point that experts have started assuming the European crisis converting into an opportunity. One review in the report says, “While further European equity market volatility seems inevitable to us, our view is that buying a share in a large, well-managed blue chip European company is buying truly global exposure at a European discount. Furthermore, we believe that markets are not the same thing as economies. For example, a large number of European companies currently enjoy rates of borrowing far below that of their domestic banks, and, in some cases, even their sovereigns.”
European policymakers are also being expected to work out their debt problem through a combination of solutions, which involve: a fast-track fiscal union pact, vast ECB intervention, further IMF assistance, implementation of EFSF-backed funding and introduction of Eurozone-wide government bonds.
Simultaneously, the report cautions global investors that they should prepare for an extended period of slow economic growth, low investment returns and elevated volatility in financial markets. These negative trends can be countered through accommodative policies to weaken the effects of prevalent deleveraging and capturing investor sentiments.
For reliable market stability, the Global Market Outlook report for 2012 also takes into account the Eastern promise of Asian and other developing world economies, which have been viewed as the world’s growth engines for many years. The Asian economies have established a longer-term case for rising living standards in relation to the developed Western economies.
However, the report has criticized the global realignment of the East as likely to be highly volatile. It reasons that the rebalancing of domestic economies is difficult, while much of the adjustment is likely to occur through changes in the value of currencies. Moreover, much of the developing world’s industrial base still depends on demand in the “rich” West. The report negates the idea that either developing world economies or their capital markets can decouple from the developed world’s trends for any extended period.
The report suggests an investment outlook that the best opportunities are to be found in high quality dividend-paying equities that have growth potential and incorporate debt markets. It favours strong business franchises in classically defensive sectors such as healthcare, telecom and non-cyclical consumer areas such as food producers.
We are also identifying strong franchises with attractive characteristics in areas such as the technology sector and among agriculture related stocks. Importantly, gold may provide a hedge against monetary debasement.
Among all these messages, the report sends an important message to the investors to assume more risk but also distinguish market-to-market volatility from the genuine risk of suffering a permanent diminution of value. It is assumed that the thematic approach and investment process suggested by the Global Market Outlook report for 2012 will help navigate through risks hovering over the global market in the year ahead.