Investment Outlook for Second Half of 2011

As I was scanning through my blogs I came across this entry that I wrote last year, about a year ago.

http://musingsonwallstreet.blogspot.com/2010/08/investment-outlook-2nd-half-2010-2011.html

I said that the equity market will surprise many and break new highs until first quarter 2011. I was absolutely spot on because stocks peaked in May 2011. However, I think I'll be wrong with regards to a recession coming in end 2011 or beginning 2012. I now think that it will probably be in 2013.

Here's why:

1. The US debt ceiling will be raised. In whatever form, whether it be Obama not getting the ceiling raised enough to last through his Nov 2012 elections or if it only lasts for 6 months.

http://www.bloomberg.com/news/2011-07-31/white-house-republicans-said-to-reach-tentative-deal-on-u-s-debt-ceiling.html

2. US government debt may be downgraded finally. This will cause a knee jerk drop in stock markets, which will be a buying opportunity. It will be a semi-permanent rise in borrowing cost for the Americans which will cause their stocks to tank and their economy to grow slower since their cost of capital will rise. But as long as they don't default, the world's financial system will continue.

3. There is always the option of QE3 if inflation falls to near 0.5%. This will propel stocks for another 6 months into early 2012.

4. The Eurozone's debt problem would have been avoided until 2013. When Europe's economic growth slow sufficiently, the debt problems of Portugal, Greece, Ireland, Spain and Italy will resurface. Germany and France may decide that it is too costly to continue to bail out the smaller countries... thereby allowing them to default.

5. Company 2nd quarter earnings so far show that 80% are above expectations. Asia and Emerging Markets are powering this global growth.

I will be very cautious going into the middle of 2012 because China's GDP may eventually dip below 7% and land hard... Eurozone may burst. After Obama's re-election, he will have to make all the hard decisions to curb spending, thereby pulling down the US' economy.

My preferred asset allocation is now 40% equities, 25% commodities, 15% Templeton Global Total Return Bond Fund SGD Hedged, 20% Amundi Volatility World + Winton Futures.