Model portfolios
Looking forward into 2012
When it comes to saving and investment there are good years and bad years. The economic climate will not always favour the route you’ve chosen for putting money aside for your future. Whether its savings accounts, the stock market, property or even antiques, there will be times of plenty and times of trial. Even cash has its drawbacks when interest rates are lower than inflation.
For a whole host of reasons, the last 12 months have been a difficult period to make any money from investing. UK Government bonds (gilts) have done well – particularly those with maturity dates over 15 years in the future. The bonds of certain other governments have also done well, most notably those of the US and Germany. Such ‘safe’ investments normally provide very modest returns, but 2011 has seen exceptionally high numbers delivered by assets that have benefited from investor fears. For example, the FTSE British Government Over 15 Years (an index of UK gilts with a maturity of over 15 years) rose 26.3% for the calendar year 1 January 2011 to 31 December 2011. If we consider that the FTSE 100 Index (a measure of the stock price of the largest 100 UK companies) fell -2.2%, we can see the disparity in the performance of the two types of asset (1).
It’s sometimes said that stock markets behave irrationally during times of fear. But we should not be too harsh when judging investor sentiment. After-all, we are investors ourselves. The last 12 months have seen very real concerns about a contagion effect, with bad debt from Southern Europe spilling out to infect the wider European banking system and pulling more solvent countries down into the collective Eurozone mire. The danger of this happening has not gone away and regardless of how the situation is resolved (if indeed it is), economic growth in Europe looks set to be subdued for several years to come.
The potential for ‘policy shocks’ resulting from government and central bank action (or inaction) remains very strong. Nor is Europe the only problem area. In China too, the prodigal economic saviour of recent years, politicians and bankers are treading a fine line between an overheating economy and one that slows too quickly. Over the last 6 months the economic consensus (from market analysts and economists) seems to have crystalized around the belief that Chinese economic growth will be slower in 2012 than most previously thought.
Despite all the wintery gloom, there are positives beginning to emerge. The US economy has lately shown some tentative signs that it is starting to turn the corner.Aided by a weak dollar, there appears to be modest employment growth, improved small business and consumer confidence and a stabilising of the residential property market. These are still very early indicators, but with the US still being the single biggest component of the global economy it is worth paying attention to.
When it comes to the stock market, equities (stocks and shares) are traditionally a forward looking asset class. This means theoretically that the market only has to believe things will be better in 12-18 months’ time for share prices to rise. Most global stock market indices are trading above their recent 12 month low points - but below their high points over the same period. It seems possible that even a small upturn in investor sentiment, accompanied by or resulting from, even modestly brighter economic news could lead to much better stock market performance.
As always, taking a diversified approach to investing is the most sensible approach in our view. Notwithstanding individual tolerance for investment risk, a portfolio that includes bonds issued by governments and companies, equities from a broad geographic base and some alternative asset exposure, such as property or commodities should be considered. We cannot say which asset type will perform best in 2012, but we can prepare ourselves for more market volatility and the likelihood that this year could be very different to the last.
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1. Performance for the FTSE British Government Over 15 Years and the FTSE 100 Index is on a total return basis, ie. includes interest and dividends – FE Analytics v3.2, January 2012