Tuesday, November 15, 2011

What I see for 2012

We’re getting close to year's end. So what is going to happen after the 2011 Santa Claus Rally - if it materializes? To be honest your guess is as good as mine. I have seen some trends and patterns shaping up last year and it may be worthwhile to extrapolate these.

Europe? Europe will have to decide how far their monetary union will integrate and how much sovereignty the member states are willing to give up to create a true monetary union with a powerful central bank and the capability of issuing Euro Bonds. I expect these member states to decide to get stronger intertwined, which probably is the only viable course other than calling the European experiment a failure as so many seem intent on doing. Even then it will take time to sort out the details of the debt mess. Probably we will keep on hearing about this debt crisis for some years to come. Like a seismic shock where its ripples over time flatten. Europe will for some years have to apply austerity and debt reduction and that means reduced growth.

The U.S. is not far behind or ahead of Europe depending on whom you talk to. Yes, we’re now in the fourth year of a banking crisis which resulted in the ballooning of the federal debt and the total debt of the public sector. As if this sector did not have enough loan trouble without the banks. Reinhart and Rogoff released this year a tedious but valuable review of all kinds of financial crises. Banking crises are often related to real estate and falling real estate prices can persist for at least three years after a crisis while government debt balloons dramatically (on average by 186%) due to bail outs, reduced government revenue (taxes) and economic stimulus. This time it seems not much different. As mentioned in earlier posts, I foresee also a revival of the housing market in 2012-2013 and this may give the U.S. an additional economic boost.

Corporate numbers in the U.S. are improving; surprising consistently to the upside. Also stock markets rarely decline in the year of a presidential election. It is possible that we are in a slowly rising bull market rather than a volatile trading range such as in the 1970s. In the 1970s the Dow Jones seemed to be capped at 1000; but the current market may swing between slightly higher highs and higher lows. Not that different from the seventies but just enough to add some appreciation to our dividend and other investment income. Whether the U.S. political climate supports it or not, the U.S. economy will likely improve, but at a snail’s pace. I suspect combined stock market and dividend returns in the 8 to10% range. This together with a slightly strengthening U.S. dollar visa vie Canada’s loonie. I would not be surprised to see a U.S. stock total return in the 10 to 15% range.

Canada will grow as well along with the BRIC countries' demand for commodities and that of the sluggishly growing U.S. economy. Obama’s Keystone blunder will result in Canada looking for other trading partners. As learned over many generations, our U.S. neighbor is only reliable when it feels like it. If Canada ever wants to truly be a commodity superpower then it will have to develop markets away from the U.S. Pipelines towards the Pacific Coast will become a national focus regardless of the ultimate Keystone outcome. The Canadian stock market is in a pretty foul mood. Our banks are cheaply valued around a modest P/E of 10 but still expensive compared to U.S. banks such as BAC (Bank of America). That our banks are more solid seems once again to be a moot point. Investors treat oil companies as if the oil price hovers around $50 dollar a barrel rather than today’s $100. This cannot last much longer. Dividend paying stocks other than the financials are expensive and may be under performing next year’s market somewhat. Overall, I foresee 2012 stock market returns in a similar range (10-15%) as that of the U.S. stock market but without the benefit of a rising U.S. dollar.

China and the other emerging economies may start to turn around the fight against inflation. They also may benefit from improving North American and European markets as well as increased domestic demand. But rising labor costs, higher energy and commodity prices and a shaky banking system may counteract these trends. Thus, I don’t foresee these markets to be stellar outperformers. For Canadian investors it may become increasingly attractive to invest in North American multi-nationals with exposure to these emerging markets and that adhere to Canadian and U.S. stock market regulation with transparent books and governance rather than investing in local BRIC stock markets or worse in individual BRIC companies. This is also supported by the earlier posted notion that it is better to build diversification by market sector rather than by region.

Government debt is often reduced by inflating the currency. This combined with falling currencies to create more competitive pricing will likely result in a higher inflationary setting. With an improving economy both  in North America and worldwide, I foresee inflation returning sooner rather than later and so will rising interest rates. If history repeats itself then I see us standing at the beginning of an era of rising inflation and interest rates. Even with improved savings rates and aging wealth accumulating baby boomers, I see a lot of inflationary pressure at the horizon. So do not invest in long term bonds or GICs. If you invest in debt, invest in short term debt (1-3 year) or in debt instruments linked to the inflation rate (reset bonds or reset preferred shares for example). Locked in long term debt may result not only in declining bond prices but also in declining purchase power of loan principal.

Remember that even in a slow growth climate, undervalued stocks may still result in above average stock market returns or at least returns better than most expect. That is in a nutshell my view for 2012. Real Estate should be a good place to be as well in the upcoming inflationary economy. Well, there you have it – my 2012 outlook ready for the waste basket.


  1. good stuff, Godfried !

    Therefore, WHICH STOCKS are good to own now as we go into 2012 ? or is this the paid subscription portion of your website .. for a mere $99/year by clicking here ?

  2. Hi Thomas,

    Thanks for the comments. Since I am not a financial planner or stock broker, I do not feel it appropriate to make specific recommendations. I sometimes use some stocks as examples for the concepts and ideas presented here.

    If I give such examples, I usually own such stocks as disclosed on this blog a number of times. Overall, I am reluctant though to make specific recommendations.

    That is also the reason that there is no 'mere click' to a more elaborate and specific news letter. The idea though is tempting :)

    Finally, If I made real recommendations in specific stocks, I might feel responsible if things went awry. My skin is not thick enough to do so. Besides there are many others who love to give stock tips both to neighbours and for money to strangers so why add yet once more voice to those masses?