“We expect financial market volatility to remain elevated in 2012,” says Steve Brice, chief investment strategist, consumer banking at Standard Chartered Bank. Financial markets will be dominated by policy decisions, and with the policy making process being extremely politicised at a time when there are leadership changes/elections in the three critical regions – China, the US and Europe (France) –uncertainty in the macro-economic environment will remain high, says Mr Brice.
As such, it makes sense to have significant allocation to asset classes that are either less volatile in their own right or significantly dampen portfolio volatility, as they have low correlation with equity markets, he says. Gold and strategies that can go long and short different asset classes, such as macro hedge fund/CTA strategies, which are expected to generate significantly positive returns in 2012, fit into this category.
Gold and gold stocks will also provide a good hedge against inflation, which remains a key concern.
The outlook on inflation is uncertain but policy makers will be very keen to avoid a situation where austerity plans turn into a destructive debt deleveraging cycle. “We expect an asymmetrically strong policy response to any emerging deflationary pressures versus rising inflation,” says Mr Brice. “This should mean that risks are skewed to significantly higher inflation rather than prolonged deflation.”
The hunt for yield continues and cash generating assets are particularly attractive in this very low interest rate environment. The focus is on high yield bonds and high yield equities, which generally outperform broad equity indices by a significant margin, in both the two market scenarios most likely to happen. “We see a 60 per cent probability of a ‘muddle-through’ or ‘mild recession’ scenario playing out in 2012, with 30 per cent probability of a deep recession scenario,” says Mr Brice, explaining that a strong growth outcome is predicted to have only 10 per cent probability.
More emphasis is put on diversifying portfolios, on riding through the ups and downs and averaging into assets offering long-term value. “We are very keen to stress to clients that volatility can actually be your friend. Equities are cheap on a standalone basis and extremely cheap relative to investment grade debt, and averaging in as markets remain weak in the short-term makes sense,” he says.
In the next three to six months, protection of wealth is absolutely key but, assuming Europe continues to make progress in addressing the crisis and quantitative easing continues in the UK and resumes in the US, equity and commodities markets will benefit. “We would be expecting to be advising our clients to add risk as we move in the second quarter of the year,” says Mr Brice.
Real assets
Hard assets, such as real estate, are appealing and they have drawn significant interest from Indian wealthy investors’ of late, explains Rajesh Saluja, CEO at Mumbai-headquartered Ask Wealth Advisors. “We are bullish on the residential real estate segment in India, where there is a huge demand supply gap,” he says, predicting demand for loans and homes will increase further as interest rates in the country start moving downwards.
In India, where Reits (real estate investment trusts) or real estate mutual funds are not available, the only way to take exposure to real estate is through private equity funds, which across the industry have gathered close to $500m dollars from wealthy clients over the last couple of years.
Indian investors are allowed to invest only $200,000 in international products per person per year and they are not allowed to leverage. But even so, they rarely take advantage of their full allowance and prefer to invest in the more familiar domestic market.
“The opportunity in India itself is so good that people are more keen to invest in India than looking outside,” says Mr Saluja.
The depreciation of the Indian rupee by 20 per cent against the US dollar over the past six months has affected stocks with high import bills and business sentiment, as many high net worth individuals are exposed to the US dollar through their firm.
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However, despite current concerns over high interest rates, a tight monetary policy and high inflation, the Indian economy is expected to grow at 6.5-7 per cent at least for the next couple of years and 8-9 per cent onwards. The domestic economy is well balanced and less dependent on exports than its neighbours, says Mr Saluja.
India’s greatest advantage is its demographics and burgeoning workforce. The government should also be able to implement policy reforms and infrastructure spending put on the back burner for the last two years and policies attracting foreign investment and improved corporate governance will also boost money inflows.
