The Weekly Report: The More Things Change…

3 January 2012

2012 is here!

As some of you rose from your food-induced coma from the long Christmas weekend and made a speedy transition into an alcohol-induced frenzy to bring in the New Year, things seemed almost perfect I’m sure. However, as the cloud of nostalgia clears up and opportunities and challenges more clearly present themselves, ask yourself this: how is this year going to be any different from 2011?

Coming towards the end of 2011, the S&P 500 forecasted a year-end market close of 1350. June 2008 was the last time the market had seen that level, just before the crisis truly took hold of the global markets. We didn’t see a 1350 year-end close (actual close of 1257.60 as at December 30, 2011) but this could only be expected. To have attained 1350 would have been to greatly belie the difficulties which characterised 2011, particularly within Europe, such as:

  • Changes at the head of the International Monetary Fund amidst scandal
  • Appointed governments in Greece, Italy and Spain
  • Debt talks fraught with threats of referenda
  • Rating downgrades of the United States and several European countries (many of whom were also put on negative watch)

This is not an exhaustive list.

S&P’s 1350 prediction was an optimistic but perhaps not realistic one given that it could be said to be predicated on the position that the U.S. could carry the rest of the world on its back. Well-received briefings from Ben Bernanke, excellent jobless claims data and a boost in housing starts are all necessary to push markets upward, and data can indeed fuel much needed optimism; but many other factors contribute to overall market sentiment.

To this end, the success or failure of Europe continues to be the predominant factor in determining the level of investors’ confidence. Even though some measure of stability has been brought to the European front, with funds channelled through the IMF to provide assistance to those worst hit, there remains much to be done.

With this said, and given the likely ramifications for global contagion during a deep recession across Europe, one may be surprised by the ‘non- response’ response of the United States to aiding the European debt crisis. The Bloomberg article below dated December 10th, 2011 provides some further clarification to this point.

“In 2009, the U.S. led a global drive to increase the International Monetary Fund’s firepower to help pull the world out of recession, pitching in $100 billion. This time, it’s a bystander in a similar effort to counter the European debt crisis.”

It went on to quote Obama:

“Europe is wealthy enough that there’s no reason why they can’t solve this problem,” Obama said Dec. 8 at a White House press conference. “It’s not as if we’re talking about some impoverished country that doesn’t have any resources.”

After reading that quote, I wondered whether the U.S. could help even if it wanted to do so. Both the U.S. (who have raised their ceiling) and Europe have unsustainable levels of debt. A pessimistic but realistic forecast tells of a bumpy ride for 2012 on either side of the pond.

Apart from the London Olympics and European Football Championship (for sports enthusiasts like myself), there are some things which may make the New Year one to remember for the right reasons.  In particular, the comparative success of emerging market economies should remain a key investment consideration.

One Financial Times article titled “World Economic Outlook Darkens” refers to the western fundamentals as poor but in contrast, “…across the emerging world, the fundamentals are good, the policy cupboard is almost full and confidence is likely to prove resilient.”

In essence, the answer may in fact be fairly close to home. For example, Panama’s USD-denominated bonds advanced 16% for 2011 and on average LATAM bonds gained 13% outpacing the 2.1% advance in emerging Europe and 8.7% increase in Asia.

If you feel starved of investment opportunities, think beyond our island states.

As we embark upon another year of uncertainty, I invite you to let Firstline Securities be your preferred destination to ‘clear the air.’  A wealth of experience, knowledge and relationships will see us prosper even in these difficult times.

Happy New Year to you and yours!

Gerard Stephens
Account Executives, Sales & Trading

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