Global Outlook and Investment Strategy

Global Markets - 2011 Review

Mixed economic data and policy induced uncertainty were major themes in the global economy in 2011. However, the aftermath of the global financial crisis remained the overall determinant of sentiment, as European policy makers struggled to allay doubts about the solvency of several EU states. Of note, the weaker fundamental outlook for the economic zone prompted a loss of investor confidence in Italy and Spain, turning the spotlight on vulnerability in the region’s banking sector.

Across the Atlantic, an unprecedented U.S. sovereign credit rating downgrade following an extended congressional debate on lifting the country’s debt ceiling further magnified uncertainties. Nevertheless, bearish signals from stagnating economies of other developed countries caused investors to seek safety in US treasuries and led to a broad sell-off in risk assets, particularly in Q3’2011. The MSCI All Country World Index fell 16.8% in Q3’2011 alone (its worst quarterly performance since Q4’2009). Also, in 2011, capital flight from emerging and frontier market assets was particularly severe, prompting some governments to intervene in their respective currency markets.

Outlook and Strategy

As I head into 2012, the global caution that prevailed at the end of 2011 is likely to continue -- and for good reasons. In 2012, as Greece continues to totter on the brink of default and the fate of the Eurozone -- and the Euro -- remain unclear, Europe is likely to drift back into recession. Also, as elections loom in the U.S, and China engineers a soft landing, I see 2012 unfolding with a myriad of adjustment risks which need to be surmounted. Accordingly, I also expect 2012 to be another eventful and challenging year for many financial markets, as the political and economic problems of 2011 persist.

In my view, the best opportunities globally are in high quality dividend-paying equities that have global exposure. There is also a stronger case for increased U.S. exposure based on growing signs of an incipient recovery. I also continue to favor strong business franchises in classically defensive sectors such as healthcare, telecoms and non-cyclical consumer areas such as food producers. With commodities and energy, there are strong supply-driven reasons to have exposure to these areas. I expect that, as long as central banks’ accommodative postures persist, gold will continue to provide a hedge against monetary debasement. Finally, in the fixed income space, based on the potential for monetary easing , following a tighter 2011, I continue to favor emerging and frontier market sovereign debt.