2012 Global Mar­ket Out­look

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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.

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