January 11, 2012 / 6:58 AM / 7 years ago

Analysis: Nothing black or white in trendless 2012

LONDON (Reuters) - If the first week in January 2012 tells us anything about the investment year ahead, it’s to be skeptical about black and white thinking.

For all the negativity surrounding the financial system and future growth, the newsflow just won’t corroborate the gloom - not entirely at least. The reality, it seems, is that despite fears of renewed world recession and even depression, the economy is less moribund than much of the commentary would have it.

In the space of a week, the United States reported a drop in unemployment last month to its lowest in nearly three years and the biggest jump in consumer credit in a decade.

And this quickening of the pulse was not isolated to the biggest economy in the world. Manufacturing and services firms boosted activity globally in December at their fastest pace since March, according to JP Morgan’s compilation of monthly purchasing manager surveys. The improvement was notable across Europe as well as in the United States.

Of course, all these surprises remain bright sparks in an otherwise fairly gloomy picture — a picture that’s not likely to be hugely improved as long as the euro sovereign debt and banking crisis remains unresolved, household and government deleveraging continues apace and fast-growing emerging economies slacken their pace.

But it does show that the financial sector woes, government balance sheet problems and euro risks have not completely snuffed out cyclical economic activity. For the committed bears, that’s frustrating. For evergreen optimists, it’s some solace.

The blend of the two means that, for the foreseeable future at least, neither will be completely satisfied.

“While global growth will surely not win any medals this year, the recent trend of positive data surprises recorded in the U.S., euro zone and at G7 aggregate level all suggest that the worst of the declines in economic activity is over, at least for now,” economists at Barclays told their clients this week.


Snapshot of asset groups in 2011: link.reuters.com/mec65s

Econ data surprises, US v Europe: link.reuters.com/muw85s

Outperformance of industrials: link.reuters.com/wuw85s



Investors have been grappling with this for several months. Industrial equities’ outperformance over wider indices picked up

again over the final months of 2011 as data signals improved.

Perhaps more remarkably, certainly in light of the late summer debt ceiling fiasco in Washington and mounting gloom about new U.S. depression risks, Wall St equities actually managed to finish 2011 flat or in the black for the year — not an intuitive conclusion for casual headline readers last year.

Long-term bulls, such as Goldman Sachs Asset Management chairman Jim O’Neill, are also keen to point out a “five-day rule” on the S&P500 index — where net gains over the first five trading days of the year have led to a positive year for equity year overall on 87 percent of 61 years since 1950.

And at the close on Monday, the S&P500 was up almost 2 percent for 2012 so far.

Of course, exceptions prove the rule. But how do you play a year of often trendless uncertainty, top down macro risks but significant pockets of decent cyclical growth?

You can always return to the seemingly endless uptrend of U.S. Treasuries, where the 10-year bond clocked up total returns of a whopping 17 percent again last year. However the price exacted from long-term buy-and-hold investors is now 10-year yields at less than two percent in a U.S. election year.

So, how about sticking with the big growth markets? That was the thinking early last year too, but the emerging market equities were one of the worst performers of the year and lost 18 percent. In fact, as Peter Tasker of Arcus Research points out, equities from the BRIC grouping of Brazil, Russia, India and China even underperformed the austerity-racked euro laggards of Portugal, Ireland, Italy, Greece and Spain.

Maybe it’s best to just load up on volatility then? Well, implied volatility measures show that’s cheaper now than it was, but not a little puzzling that in the heat of the euro crisis late last year equity volatility gauges plumbed their lowest levels in six months.

So, for many watching a host of top-down macro and sovereign risks and upside data surprises, the story reverts once again to investment in stable multi-national firms with high dividends, good balance sheets and emerging economy exposure.

In that light, it may be no surprise that the Dow Jones Industrial Average was up over five percent in 2011 while the wider S&P500 was flat.

And this year, that may be the best strategy in Europe too.

Barclays strategists reckon easier financial conditions in the euro zone - a lower exchange rate and interest rates and other “quantitative” monetary supports from the European Central Bank - could be tailwinds for a broader European equity market.

But they reckon it was still too risky to favour “high-beta” stocks, ones that tend to outperform the wider market in good times and underperform in bad times.

Looking at quality European stocks that consistently increase dividends over the past decade — including Tesco (TSCO.L), Roche ROG.VX, Unilever (ULVR.L) or Sanofi (SASY.PA) — it showed these outperforming the Stoxx600 broad index by 11 percent on an annualized basis.

Tip-toe into equity would seem to be the plan, but stay on firm ground.

Editing by Ruth Pitchford

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