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A Great Year For Stocks Ahead?

October 6, 2011 by  

A Great Year For Stocks Ahead?

As I write this article, global financial markets and the world economy are at a crossroads; some people even believe it is a one-way street to an economic collapse, especially in the Western world.

Most major stock markets are down between 10 and 20 percent this year; and, even worse, most markets are trading below the levels we had 10 years ago. Generally, the past 10 years were a lost decade for most equity investors. But even for people who did not hold equities and put money into real estate instead, the past decade was a disaster, especially the past couple of years. It seems that only precious metals and bonds generated satisfactory returns.

Long-term Equity Prices -- The World Market Index(Long-term equity prices – The World Market Index)

Now that most Western economies are at risk of slipping back into recession, it is hard to convince anyone to put more money in stocks; yet there are several good arguments that now is the time to diversify globally and allocate more funds to stocks, especially after the events we all witnessed so far this year. Global equity markets were hit hard early in the year by events such as the flooding in Australia, the earthquakes in New Zealand and the nuclear disaster in Japan. During the summer months, the attention turned again to the sovereign debt problems in Europe and the United States.

It’s been a very volatile year for financial markets and equity markets in particular. However, the increasing uncertainty helped precious metals. Gold briefly touched $1,900 per ounce a few weeks ago. In the meantime, the price corrected to about $1,650 per ounce. Now, with the outlook for only very modest growth in Western markets (with a mild recession quite likely in a number of European countries) and high uncertainty regarding the sovereign debt problems in Europe and the United States, it is very hard to find a bright spot in markets and become more optimistic that 2012 will bring better returns for equity investors.

While the economic fundamentals are clearly very weak, a severe recession is probably not going to happen; but we have to get ready for a prolonged period with disappointing economic growth. However, economic fundamentals are one thing; the stock market is quite another. Therefore, despite the challenging outlook for the global economy, certain factors point to an improving outlook for global equity markets.

Here is why I believe that global stock market prices could rise significantly in the next 12 months:

  • Valuation: Stock market valuation for most companies has come down significantly. This does not take into consideration that most companies are operating with a significantly higher efficiency, generating healthy profits in a time when economic activity is modest at best.
  • General exposure to the stock market: Generally, private investors and institutional investors are holding very low equity exposures. The primary reason for this is that many got burned in the past decade, either by the bursting of the tech bubble some 10 years ago or by the very sharp, temporary sell-offs in 2008 or 2011.
  • Relative attractiveness: With central banks printing record amounts of money, keeping funds in cash is a bad idea longer-term. What other options are there? Bonds? Interest rates are close to zero, so that’s not attractive either. Precious metals? This should be part of every investment portfolio, but buying more at elevated prices may be a bit risky. Real estate? Oh no, too much pain in the recent past; it’s too early to jump back into this market.
  • Inflation protection: While inflation destroys the true value of savings and bond returns, stocks do adjust to an increase of inflation, at least to some extent. With the huge amount of liquidity being created by central banks, risks are increasing that we will see a prolonged period of inflation, similar to the 1970s.
  • Increased payout ratios: There is a clear trend that dividends are becoming more important to investors again. Therefore, a growing number of companies are increasing their dividend payouts. Dividends used to be much more important in the old days and, after touching an all-time low a few years ago, the dividend yields are on the rise again.
  • Relative pricing: Most major stock markets are still trading at levels seen 10 years ago. However, most companies are much leaner today, carrying lower levels of debt, and the size of the global markets has increased significantly in the past 10 years. This gives companies, which operate globally, new opportunities to sell their product and services. In view of this, today’s equity prices are offering compelling value.
  • Higher growth in emerging markets: While economic growth in the U.S. and Europe will remain very disappointing in the near future, other markets are doing significantly better. China, India, Brazil and other emerging markets are showing a much more dynamic economic picture. We have to expect a temporary slowdown in emerging markets as well; but in the long run, capital will flow to markets that experience higher economic growth in the years ahead. Emerging markets will remain the growth engine for the world. We expect global gross domestic product growth to be around 3.5 percent in 2012. Despite the positive outlook for emerging markets, investors need to realize that volatility is typically higher than for Western markets and picking the right stocks is a more tricky exercise.

While we see an increasing chance for positive equity market returns in 2012, we remain cautious in the long run; and we are convinced that the time to buy and hold equity investments is over. Therefore, managing equity investments and investment portfolios in general will become much more challenging in coming years. Also, we think that certain sectors will still see disappointing returns even if the broader market outlook is improving — a good example being financial stocks, especially banks. Changing regulation and capital requirements will cause financial stocks to underperform in the near future.

For the coming weeks, we expect market volatility to remain high and stocks to continue to be under pressure, due to the uncertainty surrounding the European debt problem and the U.S. deficit problem. Although the market focus is on the European situation, we expect the U.S. crisis to become the dominating problem again. Most likely, this is going to happen once the European countries have reached an agreement on how to restructure Greece’s debt and/or to enlarge the European Stability Fund. An agreement would contain the problems for now and give European states much needed time to bring the finances in proper order.

On the other hand, there seems to be less progress in the United States in resolving the debt problem. The intense fight between the two main political parties has resulted in a deadlock, which is a very dangerous situation. One similarity between the European and the U.S. debt problems is that in the long run, spending cuts are not going to be enough. Also, the real value of future obligations needs to be reduced. This is most likely going to happen through increased levels of inflation in coming years.

Daniel Zurbrügg

is the Managing Partner of Alpine Atlantic Global Asset Management, a Swiss-based independent investment management firm. The firm provides clients with independent investment management, asset protection and family office services and is the issuer of the global investment newsletter Echo From The Alps. With a global network of partners, Alpine Atlantic's aim is to provide clients with true "turnkey" solutions for global investing. Prior to setting up Alpine Atlantic, Daniel held various positions with other banks and financial companies. Daniel is a Chartered Financial Analyst and regular guest speaker at international investment conferences.

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  • Lastmanstanding

    precious metals are quite a deal at the moment…you’ll be sorry soon if you don’t have any…from what I’m reading it will be a cold day in hell before the dollar is relinquished as the world reserve currency. Bernank, fed, etc. will print,print, print. if they don’t the game ends as more $, only more debt extends it.

    If they don’t, people will revert to tried aand true currency, value…economies that can will become more localized.

    It happens every time…America needs a reset to anything of real value and it must start with the family.

  • FreedomFighter

    Some people make money whatever way stocks go, and will again, it just wont be my money they make this time

    Laus Deo
    Semper Fi

  • http://www,chandostransport.ca GraemeB

    One needs to look at Greece to see what is coming down the pipe for other debt ridden economies. Police now see their monthly income cut to 900 euro per month and anyone who has ever travelled knows that that won’t keep you afloat fo a week let alone a month. Pensioners are now seeing their benefits cut to 500 per month and on and on.
    This is what is being proposed by the people in Congress and as seen in Greece, it automatically puts the economy into negative 8-10%, in other words, deflation. Once that happens, the credit rating is downgraded with the resulting increase in interest rates, exacerbating an already precarious problem. This is where the present nutbars in Congress are taking the country. It is impossible to solve this problems without a balanced approach of cuts with proper tax increases. The tax cuts of 10 years ago did nothing as all the jobs were moved offshore, Mexico and China. In the meantime the middle class has been gutted and yet the right wing parties want further cuts to solve the problem.
    It is not going to happen, and as long as you have a deadlocked Congress, this is going to bring the country to where the PIIGS ar currently, at bankruptcy’s door or soon to be.
    So for me, investing in stocks or anything other than land or precious metals, will inevitably lead to financial ruin. I see major upheavals both this month, and when the super twelve can’t agree, a major downgrade of credit ratings, with all the political ramifications. It is not going to be nice and Wall Street is just starting to see the protests because the underlying problems were never addressed or fixed. They need to be properly regulated as Wall Street cannot regulate itself and that has caused major ripples throughout the world which are only going to spin further out of control.

    • bob wire

      yep, that about sums it up, no more smarter then I am about such matter that’s the way I’m see things as well.

      I don’t know who the super 12 is but disagreeing is what leadership aspires to.

      Guns and drugs seems to be our less restricted markets.

      The people are losing patience and confidence with the systems in place and all the gloomy news.

      We could be witnessing a “happening” in New York today, it’s my hope something “positive” comes of it. As it appears “The ship is about to hit the Sand”

      I’d like to see the American people less dependent on banks in general. It’s sure make life much simpler in many ways. Cut them out of equation, allowing your personal business to be a private matter and not for the whole world to view. It’s like trying to play poker and showing everyone the cards you are holding. You loose every time.

    • DaveH

      Actually, in a Free Market (which we don’t have) deflation results in lower interest rates as the people have more disposable income which many invest in debt instruments, thus lowering the costs of borrowing.
      Note that throughout, I am using the term “deflation” in the common sense, that is — the lowering of prices of goods and services.
      The only reason deflation would result in lower interest rates is because the Central Bank (the Fed) is trying to stop nature with it’s profligate money printing and artificially lower rates which just prolong the malinvestment of capital in the Unfree Marketplaces. Deflation would be a good thing as consumers could buy more goods with their savings, if the Government would just get out of the way and let markets correct. Read this:
      http://mises.org/daily/1241

      • DaveH

        Deflation has been given a bad name purposely by the PTBs, because it is a propaganda tool used by the Federal Reserve and their Political Cronies to get people to accept excess money creation by the Fed, which results in weakening the value of our saved money (inflation). They have been systematically robbing the people since their creation (1913), and they can get away with it because so many people are ignorant of money matters. We need to change that.
        To learn more about inflation, read this:
        http://mises.org/daily/5743/Inflationists-in-Wolves-Clothing

  • grease12

    With the leadership there is in Washington and wars going on which the “idiots” don’t even try to win, I see little value in anything. And with lawyers trying to get their greedy hanhs on what is left after “Obummer”, do we need further proof

    • bob wire

      As long as Sheepeoples point their finger at this single president for today problems, I see little hope for any improvement. Much like the rest of us, he can only play the cards dealt him.

      It’s the game and the dealer that’s “FIXED”

      We need a new deck of cards and a new dealer.

      • BigBadJohn

        Good reply.

        The republicans have run up the national debt more than democrats, primarily by cutting taxes without cutting spending.

        BOTH parties have their special little giveaway programs that get then votes. Republicans giveaway trillions to corporate sponsors and democrats giveaway trillions to the poor and working class people. They both have screwed us.

        Who do you vote for? One party is just as bad as the other.
        Be careful what you wish for – it just might come true.

        • Christine

          Vote for Ron Paul. He’ll get the government out of the way and return to the consitution. Of course, he’ll need like-minded Senators & Congressman to get the serious work done.

          • Kimberly

            Agreed.

        • Old Henry

          “Who do you vote for?”

          Ron Paul, of course.

      • eddie47d

        Amen Bob Wire.

      • slayerwulfe

        If you mean elect to have a new and younger deck, I agree.

  • bob wire

    David, if it was for you to do, how would you cut out the cancer without killing the host?

    Anybody? I would very much appreciate hearing constructive ways that we the citizens of America might address today’s issues. Now I know the first thing many of you will say is vote for Ron Paul. Well okay, step one completed. What is step two and three and four?

    If I recall Andrew Jackson had hell of a time with the Bankers and on his death bed,I believe he knew he had just bought citizens time as forces were mounting as he weakened by the day and seen no defending champion coming to the rescue.

    • DaveH

      The problem, Bob, is the large number of people snoozing while the Politicians and their Cronies take us to the cleaners. Waking them up is the primary necessity to getting our Freedom and Prosperity back.
      How to do that? Well, Bob Livingston, mises.org, cato.org, reason.org, Stossel, Judge Napolitano, lewrockwell.com, Ron Paul, and many others are working on that right now. But we can do our part by studying money matters and Freedom matters so that we can explain the concepts intelligently to the many heavily propagandized friends and relatives that we all have. It isn’t easy to lift those blinders after those people have been brainwashed for decades.

  • old as dirt

    The demonstrations started by the left in Wall street and elsewhere have drawn participants from many persuasions. Yesterdays addition of union “thugs” suggests that soon the peaceful demonstrations will turn into riots. This is what the instigators wanted in the first place. Bloomberg will prevent the police from taking effective action and N.Y. will suffer. This may be the start of the second American revolution or more likely just anarchy. A revolution needs leadership. I don’t think Ron Paul or Herman Cain are the “go to guys” to lead a revolution. We need a “hard ass” military man the army will respect and follow. Any suggestions?

    • Opal the Gem

      Allan West?

    • Kimberly

      General Patton died a long time ago. We now have the “new, kinder, gentler military”. There aren’t any “hard-asses” left that I know of.

    • DaveH

      Those “hardass military men” will be the first to turn on you after the conflict is over (assuming your side even wins). Revolutions rarely end well. And why should they? We would still have a large number of brainwashed people who didn’t understand Freedom, who would easily fall prey to the next Sociopathic Leader.
      No, the military approach is a dangerously flawed one. Our Founders did well with the revolution because they did understand the concepts of Freedom. But even then, Alexander Hamilton and others like him were working hard to reestablish an Aristocracy not much different than that our Forefathers gave their lives to rid from this country.
      The only logical and workable approach is the one Ron Paul is taking — wake up the slumbering populace and teach then why Freedom is not only nice to have, but it also brings Peace and Prosperity.

      • vicki

        And a good way to wake up the people is with little videos like this one. You can see the references to “anarchy” being actually just people not liking what they have. Much like the wall street sitin.

        http://www.youtube.com/watch?v=N4r0VUybeXY

      • Jim W

        We do not need a military action to accomplish change in this country. All we need is a populas that pays attention and votes. What we really need right now is for the American citizens to pay attention and vote ALL incumbents out, no matter which party and get the Muslium Marxist out of the white house (preferibly into the jail house for fraud, but that is another reply). Then we need the federal government to get back to their constitutional responsibilities and limits and the states and people to their responsibilities. That will actually go a long way to solving the current problem.

    • Old Henry

      How ’bout Barney Frank?

      Oh wait a minute. You said “Hard A$$”, not “Tight A$$”…

      Judge Napalitano comes to mind. And every time he came to a press conference we could all chant “Here comes da Judge”…

      Other than that I think Opal has a good suggestion in Allan West.

  • Glndrsn

    Close Washington. Turn it into a museum. Representatives and senators can work from offices at home near the people they represent. DC was created in 1790 when it WAS the center. We didn’t even have the telegraph. Travel to a common meeting location was necessary. Today, with reliable live streaming communication, our representatives can meet MORE than 2 days a week! The junior member intimidation factor will end. Senators and congressional representatives will also have the time to meet with the folks they represent as well as spend more time with their families. After they cast their votes, they will face their constituents on the sidewalk in front of their office!

  • FederalistNo84

    A picture is worth a 1,000 words? How about a few videos?

    “Fear the Boom and Bust” a Hayek vs. Keynes Rap Anthem
    http://www.youtube.com/watch?v=d0nERTFo-Sk

    Fight of the Century: Keynes vs. Hayek Round Two
    http://www.youtube.com/watch?v=GTQnarzmTOc

  • http://bobLivingston Power to the People

    Old As Dirt….I agree with you that the protests will be expanded by the groups that feel violence begets gains. Bloomberg will not take a firm hand as he tipped his hand recently. Obummer has made several speeches recently where he encourages class warfare.

    Like it or not, the seeds of change are sowed. The current Elephant wannabes all dodge questions and attack each other like hungry dogs. All of the politicians have screwed us to the max while we go about our merry ways oblivious to the world.

    Our system is broken and doing same things but hoping for different results is insanity! I fear revolution is all that we have left..but not Obummers’ version of change. Lock and load…America is changing and the ride will be rough!

    • Old Henry

      Yep Power, the seeds of change have been sown by the farmers at the CIA just as they have done in the Middle East and Africa. And every time Little Barry opens his mouth he fertilizes the seeds…

  • Myke McCormick

    This is sound advice for those that are not convinced the entire economic system is broken beyond repair.
    I for one am convinced the system cannot be repaired. I am also convinced those that broke it knew they were breaking it and are now setting themselves up to win from failure.
    as for sliding back into a recession, that is an absolute impossibility. One cannot slide back into a pit one has not yet extricated oneself from.
    The solution gentleman is neither politics or gold. The solution is the only one there ever was. It may be found only at the foot of the Cross.

  • Mad Max

    The stock market is a suckers game. Anyone who beleive the stock market will rebound for any period of time is not living in reality. We have one way out of this mess.

    I’m not afraid anymore!

    The Revolution has started -
    Read “Common Sense 3.1” at ( http://www.revolution2.osixs.org )

    FIGHT THE CAUSE – NOT THE SYMPTOM

  • Thinking About

    We have a Congress which refuses to look at the root of the Arab Spring in Egypt and other locations enough to see the disparity which also exists in the USA. When 80% of wages are spent on food and fuel folks begin to get upset. Ron Paul has not a chance to change anything just like Obama does not have total control. As long as our Congress is unable or unwilling to sit down and work on real problems such as unemployment the economy will further slide off the cliff. Apparently with their 11% approval rating has not convinced enough of them we are not happy with their non performance.

  • Mark19441979

    I think America in a such deep hole morally and financially, that it will be hard if not impossible to get out from it. What should be done? We the voters, not our representatives, have to vote for things like: how many terms elected officials can serve and than not to be allowed to have anything to do with the lobbying(it would be good to get rid of them completely),when they can start campaign for reelection,six or eight months not sixteen before the end of the term, their benefits,restricted donations from corp, just to start.
    All this and I am sure much more could be added to the list a MUST
    in 2012 Ballot.

  • Captain Mike

    Sure stocks can go up. Or down. Nobody knows. Right now the trend is DOWN. Bet against it at your peril.

  • jopa

    Of course the author of this article will tell you it is time to invest again.That is how he makes his money and then when the Market crashes again, he already has your money for making the trades and you lose the rest of yours.Then he will say “silly me” lets try this again.Now that the Market is down it is time to invest again.The cycle goes on and on and there is a sucker born every day.

  • jim capy

    Europe will fold and we will follow. Riots and anarchy will be worldwide. Arm yorself it’s only a matter of time.

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