EKIP– Expert Club for Economics and Politics A Different Opinion
As each new year approaches, people begin to take stock of the past 12 months. From a financial markets perspective, there is one word that best describes what happened in 2011 – volatility. The year brought many surprises for investors, with $6.3 trillion wiped off the value of the stock markets alone for the year, “thanks” largely to the European debt crisis.
The chart below shows the returns for 2011 on some of the major asset classes traded in the financial markets. Contrary to many experts' expectations, US government bonds performed best. Although even at the beginning of the year interest rates on these instruments were low, they continued to fall throughout the year and are currently at record lows.
As the chart shows, other assets that performed well were oil and gold. One of the reasons for the rise in the price of black gold (in addition to constantly growing demand and limited supply) was the uprisings during the so-called Arab Spring. Despite the collapse of the last few weeks, gold managed to end the year in the red, thanks to its status as a safe haven in uncertain times and as a protection against inflation, fears of which were raised by central banks' programs to inject liquidity into economies.
There may be some surprises on the losing side. Silver, which was rumored to be much more expensive than gold, failed to live up to this prediction. On the other hand, emerging market stocks also ended 2011 with a big loss. The reasons can be found in weak demand from developed economies, uncertainty caused by the debt woes of the old continent, and last but not least, concerns about a slowdown in the growth of the Chinese economy.
What will happen in the financial markets in 2012?
For now, the debt situation in Europe remains unresolved, and in addition to the problems of the countries in the monetary union, the problems of countries outside it, such as Hungary, are starting to come to the fore. Emerging economies are likely to face another turbulent year, with attention once again focused mainly on China, where some skeptics expect a significant slowdown in economic growth.
This year, investing in low-risk government bonds (USA, UK, Germany, etc.) does not seem very good. This type of investment should not be completely excluded from the portfolio, but considering that interest rates on these instruments are currently at record low levels, the likelihood that they will continue to fall, leading to capital gains, is small. Corporate bonds of financially stable companies with strong cash flows and a large stock of financial resources look more attractive. They currently offer good returns and can be included in the portfolio as a source of income from coupon payments.
Another asset that deserves serious consideration is the shares of financially stable companies that pay dividends. Dividend-paying stocks have proven over the years to be more profitable than those that do not offer this cash flow.
Investing in commodities remains risky, given the high volatility in their prices in recent months. The declining liquidity in the markets will affect many players in this market who use high leverage (borrowed funds) to trade these assets.
As for currencies, the US dollar deserves attention, as do the currencies of some of the Scandinavian countries - for example, Sweden and Norway. The last few weeks have brought a lot of positive news for the US economy - improving production, falling unemployment, increasing energy independence (due to the discovery of new oil deposits and the development of shale gas deposits). This news has already had an impact on the US dollar, and in the last few weeks it has made a huge jump against the euro. As for the Scandinavian countries, they are currently the best-performing economies in Europe, and this will most likely lead to an increase in their currencies against the euro.
In short, new turbulence is expected in the financial markets in 2012 and my personal expectation is that the markets will move sideways with large jumps up and down. The main news that will move the markets will be related to the debt crisis in Europe, the possible slowdown of the emerging economies and last but not least, the presidential elections in the USA.
*The positions expressed in the article express the personal opinion of the author and should not be construed as investment advice. Responsibility for any action you take as a result of information expressed on this site is yours alone.
The fact that copper is in last place in terms of growth is not very encouraging for the recovery of the world economy. At least I expect a new shock to the financial markets, mainly caused by the hard, or at best soft, landing of the Chinese economy and other developing countries. In my opinion, it is only right that Asia also experiences its crisis, after it started in the US, moved to Europe (where, to be honest, it has not yet started) and, logically, it should also affect in some way the developing economies, which have been growing by 8-10% over the last 4-5 years, mainly driven by fiscal stimuli and the accumulated "momentum" I think. India, for example, is already in a currency crisis, after the rupee depreciated quite seriously. This will certainly reduce imports from other countries, which will probably affect the developed countries as well. Of course, Wall Street should be less shocked by a Chinese landing than it was by the European debt crisis, and European markets themselves are unlikely to find bigger problems than their own. So, perhaps the first six months will be about Europe and its problems, and the next six months will be about developing countries and the US elections (where the deficit problem also needs to be addressed), with fewer sharp movements than last year.
For currencies, I think we should keep an eye on the Australian Dollar (AUD) because Australia is heavily dependent on demand in China and although the US is recovering, a drop in demand for its raw materials and possible interest rate cuts to avoid a recession will negatively affect their dollar. The Swedish Krona may gain something against the Euro, but due to the dependence of its economy on the Eurozone, it will have difficulties against the US Dollar and other safer currencies in my opinion.
And finally, I would like to say that the table you attached is very nice.
Kosyo and I think that the "winterization" of China will be a leading topic in 2012, but I do not think that the shock of this will be small in the US and Europe. After all, China is the largest trading partner of the US and is also the largest foreign creditor of the US. I agree with you about the Australian dollar. I assume you know that about 2 months ago the Australian Reserve Bank lowered the interest rate for the first time in a long time, which does not speak very well for the recovery there.
(Yavor) Personally, I expect a strong year for gold and silver. Declining liquidity in the markets could quickly turn from an argument to a counterargument for buying precious metals as pressure on central banks for further quantitative easing intensifies.
The debt crisis in Europe is now entering a new phase, as evidenced by the low interest in the French bond auctions. Interest rates on 10-year Italian bonds have returned to November levels (over 7%), which for a country with such large maturities in 2012 are absolutely unsustainable, even in the medium term.
The reduction in the key interest rate has not had any effects so far. The effects of the new three-year ECB lending program are also relatively weak, although the interest rates on 2-year bonds have been suppressed to some extent.
To Yavor,
Keep in mind that Italy is mainly financed in the short term (I think their average maturity is a little over 5 years), so the 3-year ones will be more important this year, which exactly match the proposed LTRO (Long Term Refinancing Operation) by the ECB. If the knife is already stuck to the bone, Draghi can also give a 10-year LTRO, which would also finance the longer-term government securities, and that would already seem quite extreme to me. But with interest rates of around 6% at the beginning of the curve, they should be able to cope. Besides, they are unlikely to have much desire to pay such interest rates for 10 years, or 30, regardless of whether they can afford it.
For gold and silver, in my opinion, there will be mixed signals, on the one hand the dollar is still shaping up to be strong, and on the other hand money is shaping up to be quite "loose" in general globally. In addition, the big fish are unlikely to jump so en masse into precious metals again, after their price fell significantly over the last 4-5 months, but this is just my opinion. They will rather prefer the security of "safe havens" (by the way, Germany has started collecting money from its 6-month bonds, -0.0122% interest))) and some other corporate bonds of large, safe companies.
I think the 10-year LTRO will tell the story of the euro and will completely equalize the ECB's status with that of the Fed - something the Germans do not accept, at least on paper. Interest rates of 6% are still high for a country with a debt of 120% of GDP and weak growth.
And more and more often I think that buying German bonds at such an absurdly low yield and with inflation of nearly 3% is more like insurance against the collapse of the eurozone and the disappearance of the euro. In such a scenario, no one wants to have to take drachmas, for example 🙂
Just to add that platinum is currently priced lower than gold, which historically hasn't been very common, meaning there's a lot of "investment gold" on the market, and that doesn't bode well for the sustainability of demand. There may be a slight price increase this year, absent major geopolitical turmoil, but I don't think it will be like last year.
Yes, right now a lot of things are just for insurance, at least until the clouds over all possible solutions to the Euro problem clear.
In addition to the discussion about seeking asylum, the deposits of banks in Europe in the ECB - money invested without profitability - are increasing. This is very bad, because besides showing that banks are afraid to invest and are looking for a place to "hide" their money safely, lending is decreasing, and businesses without lending will fall into great difficulties and the real economy will be seriously affected. "Deleveering" in a word 🙂