Want to make money in 2012? Spend a moment thinking about today's most-hated investments.
Contrarians know that the best deals come from rummaging through the market's bargain bins, the crannies of capitalism that most buyers are shunning.
To be sure, contrarian investing involves risk and doesn't always work out. But a habit of buying what's out-of-favour makes sense if done with discretion. By definition, unpopular opportunities are relatively cheap, which helps to limit your potential losses. And since expectations are so low, it doesn't take much to send unloved investments shooting higher.
Consider the past few months as a case in point. U.S. Treasuries and utility stocks were widely dismissed by investment pros as 2011 began. They're ending December among the year's best performers.
What lightly regarded investments of today have the potential to wind up as stars in 2012? A few possibilities:
U.S. real estate: Perhaps no sector is as much hated as the U.S. real estate market – and no wonder. Prices have slid more than 30 per cent since 2005.
There are early signs, however, that conditions are shifting. Builders are adding only 600,000 new homes a year for a market that requires about 1.5 million, according to Bank of Nova Scotia economist Adrienne Warren.
"Barring another major setback in the U.S. economy, the deep U.S. housing slump of the past five years appears to be near a bottom," she wrote in a year-end report.
On the plus side, mortgage delinquency and foreclosure rates have started to decline, affordability is near a record high, and rental markets have started to tighten. On the negative side, unemployment remains high, credit is tight and unsold and foreclosed properties linger on the market.
Ms. Warren says a sustainable recovery may still be years away. She doesn't expect housing to begin to power economic growth again until 2015. But for patient investors that's not necessarily a deterrent. Buying a condo in Florida or a house in Arizona offers the possibility of getting in on the early stages of a rally – and enjoying a nice vacation property in the meantime.
Copper: The red metal has had a dismal year. It hit a record $4.60 (U.S.) a pound last February before fears about weakening growth in China and Europe sent it tumbling to $3.40 by December.
The metal could stage a recovery in 2012. If China resumes its expansionist policies, then prices for the vital industrial metal will climb, says Patricia Mohr, commodity market specialist at Bank of Nova Scotia.
China consumes 42 per cent of the world's copper production, she estimates. As long as the Asian nation continues to grow strongly, it will provide solid support for metal prices.
The risk, of course, is that the Chinese economy will hit the skids. Ms. Mohr thinks that's unlikely. While many economists have grown concerned about China's red hot housing market, she says the government stands ready to offset any downturn in private construction projects. Among other initiatives, it plans to build 20 million social housing apartments over two years.
Ms. Mohr thinks that $4 a pound is a realistic price for the industrial metal by the end of 2012, because global demand is exceeding supply. If that's the case, investors who hold copper mining stocks stand to benefit.
Treasuries: Few investors see potential in U.S. government debt after its big rise in the past year. Over the course of 2011, the yield on the benchmark 10-year U.S. Treasury fell from more than 3 per cent to less than 2 per cent. T-bill prices, which move in the opposite direction to yields, surged by almost 15 per cent.
Conventional wisdom says a run like that can't continue a second year, but Paul Ashworth, chief U.S. economist for Capital Economics, begs to differ. He forecasts that the 10-year Treasury yield will fall still further and finish 2012 at 1.5 per cent. He thinks weak economic growth and another round of stimulus from the U.S. Federal Reserve, in the form of bond purchases, will support T-bills. Consider yourself warned.