Prelude to 2012 Investment Outlook

I am tempted to be bullish. Chief reasons for being so are:

1) Most analysts and retail investors are bearish for the first half of 2012 and then more bullish for the second half. This is exactly the reverse at the start of 2011, when most were bullish. In 2011, stock markets peaked around May for S&P500 and as early as Nov / Dec 2010 for Asia and Emerging Markets. Hence, it is almost a universal truth that the majority are usually wrong and we should go contrarian. First half of 2012 therefore may not be as bad as most think but the second half of 2012 could be worse than most anticipated, when investors start to pour in money.

2) Many high networth clients are holding on to cash or very safe investments, like high yield bonds, investment grade bonds, alternative funds. They are waiting for that dip in stocks to enter. When so many are waiting for dips, it usually is either very shallow or does not occur.

3) Valuations are relatively cheap. If you look at PE ratios, we are just 10% above March 2009 levels. But if you look at the 10 year average earnings PE, we are 30% above the median and there may be 50 - 70% downside. Profit margins have yet to normalise.

4) Interest rates are still very benign at least until 2013. This is highly conducive for risk assets to rise. 

However, the technical picture is still rather bearish. Asia ex Japan and Emerging Market stocks are faring worse than the US. Look at the STI chart below. Despite the rally on 3 Jan 2012, the first trading day of this year, the trend is still a bear. Volume is still well below Aug 2011 level when there was a collapse. There are huge resistances along the 200d MA at 2950. 

The S&P500 chart looks a lot better. The index is forming an upward and it is possible for the index to reach 1300, even to 1500, although the latter would be unlikely. 

This is a prelude to my outlook for 2012. Lately, the economic data coming from China, India, the US and EU have been better than expected. Only the EU is in contractionary mode, i.e. PMI < 50. The rest of the major economies are either flat or expanding slightly. The EUR489 billion QE by ECB appears to have kicked the can down the road.

Conclusion:

The day of reckoning has been delayed for 6 to 12 months. Central banks are hoping that by boosting liquidity, the financial sector will lend more freely to companies, which in turn invest / engage in capex. But the demand has to come from somewhere. In a world where half the world's GDP is deleveraging at the consumer level (mainly the OECD countries), consumers from emerging markets are unlikely to plug that gap. At best, we will muddle along. Global GDP will fall to between 0.8 - 1.8% for 2012. That's as bad as 2008's Global Financial Crisis. The worst is yet to come. But in the meantime, markets may fluctuate quite a bit. Stay safe and go for dividend plays, alternative funds that can long/short all asset classes.

The only reason stocks have not crashed to 2008's lows is the financial rigging by central bankers. My asset allocation under such a scenario is:
Equities 20% (mainly commodity related sectors, like First State Global Resource, JPM Natural Resources).
Gold 20% (mainly gold futures, not gold equities because the diversification benefits are lesser for the latter, Schroder Gold).
Alternatives 40% (mainly Amundi Volatility World and Winton).
High Yield Bonds 20% (mainly Templeton Total Return and Alliance Bernstein Global High Yield)