Macro

2012 Outlook: Overcoming Debt, Deadlock and Financial Repression

February 6th, 2012 | By Nick Sargen

Each year I provide my economic and market outlook. Last year we called for a continued sub-par recovery in the economy but with a market environment characterized by rising bond yields and a pick-up in the equity markets. So, we got the fundamental factors right but were admittedly a bit early in our timing.

Throughout 2011, as the forces impacting the markets changed quite swiftly and significantly, we repositioned client portfolios. As a result, many of our fixed income strategies did well compared with their benchmarks. 2012 calls for investors to remain nimble and flexible.


My 2012 Outlook is summarized as follows:

  • The two-year rally in risk assets ended in the spring of 2011, followed by renewed market turbulence which has raised fears about a replay of the 2008 financial crisis.
  • This is not our base case however mainly because there are no major imbalances in the U.S. economy and it has proved to be resilient to shocks. Nonetheless, the economy still faces formidable headwinds from recession risk in Europe as well as a slowdown in China and other emerging economies.
  • Equity markets will be influenced by how effective European leaders are in bolstering European Monetary Union (EMU) and whether the 2012 elections end political gridlock in the United States. Until there is greater clarity on these issues, we believe markets will stay volatile. Hence, we remain neutral on equities and continue to employ a barbell approach with exposure to higher quality dividend paying stocks as well as deeper value positions
  • Amid these uncertainties, the Federal Reserve and other central banks will strive to ease debt burdens for households and governments by maintaining artificially low interest rates. Indeed, we are positioning fixed-income portfolios for an environment that has been called “financial repression” by remaining neutral on duration and tactically moving positions in and out of US Treasuries and government-related sectors while being selective with credit risk.