A third of investors think that next year will be even worse than 2011 for the equity markets, according to the latest FE Trustnet poll.
In a year that has been plagued by high levels of daily volatility, global disasters, growing concerns about the sustainability of sovereign debt and genuine fears that the entire banking system could be brought to the brink, it seems almost impossible to believe that the situation could worsen.
Clearly the fact that the eurozone crisis is yet to show signs of reaching a credible resolution is still weighing heavy on investors’ minds.
Jamil Baz, chief investment strategist at GLG, says that more worrying still is that the world’s major economies will struggle to post any real economic growth in an environment where strengthening the public balance sheet is the single biggest concern.
“The really important issue is leverage. After a raft of central bank intervention, the US debt to GDP ratio remains close to 350 per cent,” he said. “The fundamentally necessary and painful deleveraging process has yet to begin in earnest. Even if the US authorities succeed in deleveraging at a rate of 10 percentage points a year, it will take 15 years before the US economy is back to normal. This means 15 years of sub-par economic growth.”
He added: “While quantitative easing can conjure currency out of thin air, the fundamental problem is not a shortage of cash, but a lack of collateral. Central banks cannot create capital – only a buoyant economy will do that – and a devastating deleverage will absorb a significant proportion of GDP. The prevailing equity risk premium is simply not sufficient to justify investing in the stock market.”
| Will equities have a better year in 2012 than they did in 2011? | |
| Yes | 64% |
| No | 36% |
Confidence in the equity markets has slumped dramatically this year. Back in June 44 per cent of investors said they were more bearish on equities than they were at the start of the year.
Despite the doom and gloom, two thirds of investors think that next year could see some more certainty return to the markets.
Ben Funnell, manager of the GLG Balanced Managed and GLG Stockmarket Managed funds, says investors should remain focused on the fundamentals in 2012 and take advantage of any weakness in the market.
“Should European stock markets fall around 30 per cent from here, the opportunity in equities would begin to look incredibly compelling on a price to earnings basis,” he said. “Central banking policy will have a significant impact in determining the economic trajectory and the gyrations in the stock market. It seems likely that we will see shorter cycles of a bigger magnitude in the years ahead, and this will create windows of opportunities for equity investors.”
Funnell warns that too defensive could lead investors to miss out on any upside.
“A more robust and enduring rally might occur if any initial upward movement were to inspire a shift in sentiment and portfolio positioning,” he said. “It is therefore potentially a dangerous time for investors to be short risk.”
A recent FE Trustnet article highlighted that while there are some structural headwinds, equity markets look relatively cheap on a historic basis.