The beginning of The End
In 2012 global equities are most likely to under-perform credit and commodities, at least during the first six months. Neither bond bear market, nor equity bull market is possible to be projected in the current economic scenario.
Global private equities will enter 2012 near the midpoint of their secular trading ranges. These ranges have been in place since 1997 and have endured a series of boom-bust cycles in Asia and the emerging markets, and in technology, real estate and commodities. Therefore, the equity upside in 2012 remains very much constrained.
During the second half of 2011 investors de-rated private equities, and this process is yet to end in Europe. The reason for this behavior is that too much debt forced de-leveraging and therefore, asset price deflation.
The early 2012 will be definitely defensive. Equity investors will remain focused on the policy events and market positioning, two factors that have caused many trading inflections’ points in the recent de-leveraging years.
However, a few factors in 2012 could cause a true future re-rating of equities to begin, or in other words – upgrading. These are: renewed confidence in the consumer power, especially in Asia, reduction in oil and commodity prices, as well as lower inflation and interest rates.
At some point the current trading range for global equities will be broken by macro-economic events. In the meantime, investors should have the confidence to pick the right stocks. A decline in correlation and volatility is very likely from the current unprecedented levels and should breed higher returns. A buy-and-hold strategy for the best companies, and aggressive stock pair trades could be the key to gains.
Despite a short-term caution, private equities on a 2-3 year view look persuasive. Investors enter 2012 in a fearful state, but any sharp falls in equities in 2012 it is doubtful. The ingredients for equity out-performance over the medium-term are being put in place, and 2012 could represent the beginning of the end of the great bear market in equities.
Most of the big companies are in shape, consumer de-leveraging is underway and political changes are very much likely in 2012 in many countries.