A look back at 2011, and a peek at the year ahead
Tom Elliott examines the reasons behind the economic uncertainty and lack of growth in 2011, and explores the outlook for 2012.
2011 – a year marked by volatility and uncertainty
Investors had a difficult year in 2011. With stubbornly high inflation in the eurozone,
the UK and the US, worrying global economic developments and volatile stock markets,
it has been difficult for investors to achieve attractive returns.
Global growth has been steadily revised down, from what were in any case modest
initial projections. The eurozone debt crisis reached a level where some fear the
sustainability of the euro itself is under threat. Across the Atlantic, the US is
still the world’s largest economy but it may be hampered by a serious long-term
unemployment problem.
Knock-on effects
An earthquake and tsunami devastated Japan in March and as well as the tragic human
toll, a subsequent nuclear power plant explosion further disrupted output in the
world’s third largest economy. The knock-on effects affected supplies around the
world, particularly in the auto and technology sectors. These factors were the driving
forces behind the fall in growth expectations seen in 2011, particularly in the
second half of the year, which in turn led to a lowering of company profit growth
estimates.
Problems in the banking sector persisted. The reluctance of some European and US
banks to lend to small and medium sized companies (which provide the bulk of employment
growth within the developed world) again contributed to the disappointing growth
in these regions.
Banks bear the brunt of the sell-off
Looking closer at stock markets, it’s not surprising that financial shares were
the weakest on global markets – although there were opportunities for nimble investors
to take advantage of rallies and selloffs. However, for the year as a whole, there
were relatively slight losses from companies that provide consumer staples (food
& drink, household products) and healthcare.
Stock markets also fell in emerging markets. Although growth in China, Brazil, India
and Russia was stronger than in the developed world, their companies were affected
because many emerging economy central banks had to raise interest rates to combat
inflation. GDP growth forecasts were also downgraded due to weaker growth in developed
economies.
2012 outlook – more of the same or fresh hope?
At least one key event that troubled markets in 2011 will almost certainly continue
to reverberate in 2012: the eurozone debt crisis. Even if a definitive solution
is soon found, the economic damage has been done and all the countries in Europe
will suffer lower growth because of it. The UK economy will also be hit by weak
global growth and won’t be able to rely on exports to offset fragile domestic conditions.
Outside of Europe the outlook is a bit brighter. In the run-up to the US election,
it is likely that the government will try and pursue policies that encourage economic
growth. Meanwhile, Japan should continue to recover from the earthquake and tsunami.
Elsewhere in Asia, economic growth will inevitably slow as trade with Europe drops,
but this growth will still outstrip any other region of the world. Latin America’s
commodity exports to China will continue and rising domestic demand will benefit
both Brazil and Mexico.
With safe havens constrained, where can investors turn?
The eurozone crisis is likely to keep investors wary but many traditional safe haven
options currently offer little potential return. Developed world government bond
yields are well below what is considered reasonable and the price of gold is at
risk because of a potential escalation in the eurozone crisis and the prospect of
a stronger dollar.
We believe that the investments that offer the best potential return over the next
year include higher yield bonds such as emerging market government bonds and high
yield bonds from companies. Shares should recover some of their losses from 2011
as the outlook in Europe improves and they appear attractively valued. However,
company profit growth will be hard to come by, moderating gains. Companies that
offer higher dividend yields may appeal to investors who would like an additional
cushion when investing in the stock market.
More market news and views
For a look back at the events of the previous seven days on the world’s major stock markets read Tom’s weekly stock market report
For the latest monthly views from J.P. Morgan Asset Management's regional investment desks, with an overview of current strategy and the latest opinions on the outlook for global stock markets read Edmund Brandt’s Investment Director’s bulletin