Category: Equities

2012 Outlook

The year 2011 has been marked with extreme volatility, much to do indecisive politicians that have not only shown a lack of decision making and slow response to changing environments, but that have actively worked their way towards the wrong direction and into a corner. As such, when I received the following quote from an acquaintance, I could do nothing but concur.

As Year end draws nearer, the worry is the main positive for 2011 is it's looking likely to be a whole lot better than 2012...

There is nothing that would indicate the volatility to decrease in 2012. What has changed, however, is the psychology of it all. It is amazing what people, and then in particular market participants, can get used to. An equity index move of 3-5 per cent points is now nearly to consider normal, and at least don't prompt too much attention. The investors are also a different breed, and trying to learn to take advantage of the volatility to increase earnings, and act counter-cyclically to take advantages of dips in the market.

For the Fixed Income space, the phrases regulatory risk, execution risk and event risk has truly been experienced, and players are adapting to expect to wait for windows for proper transactions depending on the surroundings.

All of this is likely to continue, and the world is bracing for outcome of a break-up of the European monetary union. This coming week the International Swaps and Derivatives Association will hold a webcast with its members next week to discuss what would happen to euro-denominated derivatives contracts in the event of one or more countries leaving the euro zone.

Personally I'm not expecting a full-fledged break-up of the union within 2012 where the Euro completely cease to exist, resulting in a dependence on Lex Monetae for interpretations of contracts, but I do consider it likely to have one or several countries seceding the euro-zone and getting a New National Currency (NNC), which can result in interesting contractual effects and monetary flow control (prohibition of exporting hard cash from a country can result in a foreign governed contract not being enforceable still)

If nothing else 2012 looks to become a very interesting year - but not a year for the weak minded.

Time to change equity position from underweight to neutral?

After being underweight equities for a while OSEBX has corrected down more than 20 per cent, together with other large drops in global equities following political indecisiveness on both sides of the Atlantic. The quick drop, however, changes the Risk/Reward consideration and it now seems prudent for longer-term investors to start gradually increase the equity position (in particular for strong bluechips) . As such I'm now changing my equity view from underweight to neutral.

The risks to the economy still remains high, but long-term there should be support in possible inflationary pressure (lets be real, the governments needs inflation to get out of the debt crisis) and a possible QE3 (depreciation in USD can only help the US) could contribute to equity buying.

Still underweight equities

The 11th of March (OSEBX close 435) I expected a correction to OSEBX, which reached an intraday low over the past few months of 409 the 15th. This was less of a correction than expected (but still down 6% within a few days). Since then the index has returned to trading in the narrow tunnel of 430 to 445, having difficulties breaching the barrier of the 76.40 fibb levels. Closing today at 436, virtually unchanged since the last update (and as such a better return for being allocated elsewhere).

The uncertainties regarding the peripherals in the eurozone, as well as increasing signals of weaker growth in the economies still support an underweight in equities. This is further supported by expectations of rate hikes which should make bonds increasingly attractive, and could reduce liquidity flowing into equities. In the current yield environment, however, the credit spreads found for higher rated debt instruments supports investments in Floating Rate Notes rather than bonds or equities.

In support of buying OSEBX we have a rising 200 daily moving average, currently at 417 (roughly 4.5 per. cent. down from today's close) which could prove a resistance level. But the risks in the economy in my opinion still provide a poor Risk/Reward.

Updated technical analysis of OSEBX:

(click image for full size)