| Kippreport.com

‏World on the brink: a fragile 2012 ahead

December 10, 2011 9:24 by Reuters

…substantial losses, volatility bubbles and frequent switching between ‘risk on/risk off’.”

Merrill Lynch Wealth Management EMEA recommends overweighting US and UK to be most effectively positioned for this environment. US large caps are the top pick, reflecting their more reliable performance in meeting analysts’ earnings forecasts than peers elsewhere.

Consumer discretionary, consumer staples and information technology are the three preferred sectors. These areas offer the best combination of earnings quality, valuation and alignment with the macro environment. Merrill Lynch Wealth Management EMEA also favours broad growth themes, including the emerging market consumer and global infrastructure. “We await policy easing in China before increasing emerging market holdings,” says Mr O’Neill.

Merrill Lynch Wealth Management EMEA also recommends being underweight both Eurozone and Japanese equities in 2012. While Japan’s growth should recover in 2012, corporate earnings are likely to disappoint. Eurozone equities are cheap and sentiment toward them is already at rock bottom, but O’Neill warns it is too early to invest in the region due to its high risk.

In fixed income, investors should prefer credit to sovereign investments. This includes both investment-grade and high-yield corporate bonds, with a preference for US companies. A tolerable level of defaults is already priced into the high yield market. Investors should particularly avoid sovereign and bank exposures in peripheral Eurozone economies.

“Attractive credit spreads price in a significant increase in defaults which in any case we do not expect. Core sovereign bonds remain unattractive in all scenarios, other than a prolonged global recession,” says O’Neill.

UK PROPERTY OFFERS OPPORTUNITY
Expectations of lower inflation reduce commodities’ appeal. Two of 2011’s strongest performing assets, gold and oil, are unlikely to replicate these returns in 2012. While supported by very low real interest rates, gold is likely to be held back by the US dollar’s strength; however, an aggressive quantitative easing programme could provide a catalyst for a considerable move higher. Controlled supply should limit crude oil’s potential decline.

“We do not preclude adding commodities exposure if China reflates sooner than we expect. Industrial metals such as copper would be notable beneficiaries,” says O’Neill.

Commercial real estate, specifically in the UK, could provide sound income opportunities in 2012. The focus is very much on the prime sector. Polarisation between prime and good secondary property, and lower quality assets will continue, according to Merrill Lynch Wealth Management EMEA.

Three years on from the 2008-9 financial crisis, investors are once again confronted with deep discounts in the value of assets linked to this very atypical business cycle, says O’Neill. “In 2012, despite shrinking opportunities for portfolio diversification, investors should focus on yield and quality, while aligning their portfolios to allow critical longer term growth themes to be captured.”

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Tags: 2012, Banking, Banking & Finance, China, crisis, debt, emerging markets, investment, Merrill Lynch, Middle East, recession, trend, US, wealth management