Three expert insights on how to invest in 2012

ALLOCATING ASSETS WILL BE DIFFICULT

TOM STEVENSON

FIDELITY WORLDWIDE INVESTMENT

THE nervous tone of early trading in 2012 has carried on where it left off at the end of a year that investors will gladly forget. An initial rally has soon run out of steam as European bond yields rise again and everyone remembers that the region’s deep-seated problems are far from solved. The themes that dominated 2011 will feature strongly again in 2012. It will be a year in which politics trumps economics and finance.

Asset allocation will continue to be challenging this year. Equities look better value than bonds but, with so much uncertainty, the safe haven appeal of the highest-grade government paper may not disappear altogether. And with corporate profits and margins under pressure as key economies flirt with recession, stock market valuations may not be quite as cheap as they look.

The markets which performed worst in 2011 may do better relatively speaking. Emerging markets had a shocker last year, compounded in some cases like India by weak currencies. The long-term growth differential between the emerging and developed world persists, however, and at some point it will feed through to markets as well. Emerging markets tend to underperform on the way down but outperform as markets recover. It all depends on whether the landing in China is soft or hard.

The UK economy faces a tough 2012, with feeble growth, rising unemployment and a weak housing market. Fortunately, the London stock market is one of the world’s most international and on a historically low multiple of earnings and offering an attractive dividend yield, it might fare relatively well again.

EUROPE’S FATE WILL MOVE THE MARKETS

ROB BURGEMAN

BREWIN DOLPHIN

IT’S a safe bet that Europe will continue to dominate the economic landscape in early 2012. The news of the ECB lending package should bode well for both its banks and countries weighed down by sovereign debt. This combined with pleasantly robust economic data from the US means that this could be the start of a stuttering recovery.

So where will we be at the end of 2012? The trite answer is “who knows?” There are a lot of ifs and buts ahead. For instance, if the EU can come up with a sensible resolution; if the Democrats and Republicans start acting in America’s interest; and if the IMF and central banks ensure credit remains available and the global financial system does not grind to a halt, things could look far better at the end of 2012 than they do now.

Against this background, we think global equities should be fairly well supported. Companies with strong balance sheets and robust dividend policies as part of a well diversified portfolio should deliver reasonable returns. Our FTSE 100 year-end target is 5,850, to which should be added a dividend yield of 4 per cent. The S&P 500 has been one of the better performing areas over the last year, and I would think it not unreasonable to expect a similar kind of return over the next year, giving us a forecast of around 1,350. Property seems unlikely to make much progress and interest rate policy is likely to remain extremely loose – this is certainly the message being sent out by bond markets. Finally, if our prognosis is correct and some of the traumas of 2011 begin to ease over 2012, the demand for gold may begin to abate and we could see its price come back to nearer $1,250 than it is currently.

SOME HAPPY RETURNS ARE STILL VIABLE

CHARLES MACKINNON

THURLEIGH INVESTMENT MANAGERS

DESPITE the numerous opportunities for market riot, our central case is for 2012 to produce positive returns of between 3 per cent and 5 per cent for a balanced portfolio, with the vast majority of those returns coming from yield.

It will be a volatile year, with equity markets trading in a broad range of at least 10 per cent above and below current levels.

We think that the large growth economies of China, Brazil, South Korea and Taiwan will continue to grow, and their currencies and bond markets will continue to deepen and strengthen. We think that the Eurozone area will have fragmented somehow, with either some departures, or some form of dual currency emerging (convertible euros and non-convertible euros) to enable the most indebted participants to reflate their economies. We think that growth in the US will be surprisingly strong, certainly positive. For the UK, our perception is that we will dip in and out of technical recession, but we will avoid a significant downturn due to further devaluation of sterling.

Within the equity and the bond portfolios, we will continue to move them towards a higher yield profile. We currently have 20 per cent of our bond portfolios exposed to high yield, and we anticipate growing this significantly at the expense of the strategic bond positions.

Within equity portfolios, we anticipate altering the weighting of the indices and funds we use to increase the dividend yield significantly with a continued focus on global multinationals.