The first half of 2012 will see continued volatility, as investors swing from greed to fear, and back again, based on the tide of macroeconomic news out of Europe and Asia. But the second half might be a different story altogether, according to Craig Basinger, chief investment officer, Macquarie Private Wealth Inc.
The global research team at Macquarie expects the markets will become desensitized to such news, with a renewed focus on individual company data.
“The market incorporates information very quickly,” Basinger says. “The first time there was rioting in the street of Greece, the markets sold off. They can riot all over Europe now and I’m not sure it would have a huge impact. The market has already incorporated that information and it’s reflected in a lot of the valuations.”
He says the global market has become largely accustomed to the bad news coming out of Europe, but impending elections in France and Germany would rightly catch the market’s attention. Politicking and pandering to the electorate could have an impact on any restructuring plan.
“Our expectations for the U.S. economy are pretty positive; we’re expecting it to surprise to the upside this year,” he says, pointing out that market expectations are so low that an upside surprise is nearly inevitable.
The consumer deleveraging process has been underway for more than four years, and consumers are becoming a more confident with their ability to spend. Meanwhile employment has been ticking higher, and that trend should continue.
For most of the past decade, growth has been driven by the consumer in good times and government spending in bad times. Notably absent as been any significant business spending. That is about to change, Basinger says.
“Corporate America has very strong balance sheets—lots of cash,” he explains. “They are obviously unwilling to spend on the labour side, but they are willing to spend on productivity gains. That kind of spending benefits the markets much more than pure consumer spending.”
Productivity enhancements will benefit North American-focussed stocks in the industrial and technology sectors, he says. Most Canadian portfolios, however, are probably over-exposed to the globally-exposed cyclicals, such as energy and materials sectors, which he recommends underweighting.
Base metal producers, for example, will suffer as the Chinese economy heads into a “soft landing”, while energy prices should fall as Libyan production comes back online.
“The bond market might be a bit of a surprise; we’re pretty negative on the bond side,” he says. “With all the uncertainty, there’s a huge premium that’s been placed on the bond market as a safe haven asset. It’s relatively unsustainable.”
He’s not calling for a slaughter on the bond market, though. As 10-year yields rise from 1.8% to 3%, he expects “big lines of people” willing to buy them.
“In our view, investors need to be a little more tactical,” he says. “When to add a little more to equity, and when to add to bonds; when to make these shifts will be a big determinant of performance, especially in the first half of the year.”