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Outlook

10 market predictions for 2012 - and how to profit from them Add to ...

Oliver Pursche is co-portfolio manager of GMG Defensive Beta Fund. Shares mentioned in this post that are held by the GMG Defensive Beta Fund are identified.



Live by the sword, die by the sword. The fact is everyone in the financial services or wealth management business has thoughts – secret or otherwise – about what they feel the markets will do next year. Question is, are they brave enough to go on the record about it? I am.

And I’ll go one better. This time next year I’ll revisit these predictions and either pillory myself, or emboldened, make 10 more.

Prediction 1: The S&P 500 Index will rise by at least 10 per cent.

This may not be as brave as it seems. For this one I’ve got history on my side. Since 1900, the market has gone down just three times in a presidential election year: 1960, 1980 and 2008. But market psychology aside, if you believe that we will avoid a global recession – and I think we already have (see some of my other predictions below)–wider recognition of this will act as a catalysts for stocks in the coming year.

If you have a lot of conviction this prediction will come true, you might consider buying the Russell 1000 High Beta ETF . If you think the election will work its magic, but that the patient still has a bad case of anemia, you might consider buying the Russell 1000 Low Volatility ETF .

Prediction 2: Greece will begin official negotiations to exit the euro.

Nobody wants to see this because the implications are severe. If Greece drops the euro in a dramatic fashion, we will see a huge flight of capital out of Spain, Italy and Portugal, into the northern countries such as Germany, Holland and Denmark. Because of this Greece will exit in a more structured and orderly fashion. Likely, the country will negotiate to still pay 50 cents on the dollar for its sovereign debts then reintroduce the drachma alongside the euro for a three year time frame, with the decoupling occurring over time.

For investors, it’s hard to play the upside of this by for example, shorting country-specific ETFs. Central banks will be heavily involved in steering the transitions, and it’s never wise to fight central banks. A better strategy: underweight international and emerging market exposure.

Prediction 3: President Obama wins reelection.

In spite of a weak economy and continued high unemployment the republican party’s own lack of leadership and cohesiveness will weaken them to the point where Obama looks like the better option. Moreover, the party’s willingness to pander to the right wing will make them unpopular with middle class and middle of the road voters. As a result, I would expect the election to be marked by record low turnout frustration, apathy and disgust, but at the end of the day, Obama will have won four more years in office.

Prediction 4: China will allow the Renminbi (Yuan) to rise nearly 8 per cent against the dollar.

Slowly and rather quietly, China has already begun to loosen monetary policy. For instance, at the end of November, it lowered the reserve requirement for six banks. Unlike here in the U.S. where monetary policy is carried out through a series of complex market transactions, China’s government simply told these banks what to do. China will continue to lower rates in the first half of the year to spur on growth. Europe accounts for roughly 25 per cent of China’s exports, and lower demand from Europe will be material for China.

I firmly believe that the Chinese government’s monetary policy is being dictated by more than just supply and demand. Just 20 years ago, the Chinese people lived in conditions that were equivalent to those we experienced in this country during the 19th century.

The Chinese government realizes it must keep this progress going or face massive social unrest. Count on them to do everything they can to maintain growth. Looser monetary policy may the least of it.

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