Unsettled conditions are forecast for investors in 2012
Government cutbacks may well have a greater impact in 2012 than last year, eroding consumer confidence and creating conditions for an extended period of limited growth.
Nonetheless, it’s important not to be overly pessimistic: we should not allow ourselves to be unduly daunted by fears of a double-dip recession.
The Bank of England appears confident that inflation can be pegged back to two per cent this year, although any decrease is likely to be slow, during which time inflation will remain higher than any of us would like.
The markets will be neither bulls nor bears, and the pendulum will swing back and forth, driven by the latest reports on consumer confidence, especially in the US, and growth in developing nations.
On a more positive note, the world would be a very different place if we were no longer concerned by eurozone defaults, the US housing market recovered, China and other developing nations balance inflation and growth, and consumer confidence rallied in the UK.
Of course it would be a truly miraculous year if all these things happened at once. All the same, if more than one was to occur, we would be well on the road to recovery.
Against this unsettled background, it has never been more important to maintain a diversified portfolio. This means managing exposure to a range of asset classes, not just developed market equities and emerging market equities, but fixed interest, property, gilts, bonds and commodities.
Looking at the broad asset classes, many believe government bonds now only have safe-haven appeal, with corporate bonds better able to cope with any increases in interest rates or improvement in economic outlook.
As for equities, the US and UK look favourable compared to Europe, with a similar picture for commercial property. Asian and emerging market equities are likely to continue to be volatile, yet with arguably the greatest longer term growth potential.
Generally speaking asset classes will be affected differently by prevailing market conditions. This has historically provided the balance in portfolios. However, for the last few years there has been a much higher degree of correlation. Unfortunately this may continue.