Hedge fund managers may not always be right, but they're rarely in doubt.
Clients pay these money managers to produce consistent returns amid market volatility. That requires an independent turn of mind.
When it comes to prognostication, hedge fund managers have another virtue as well. Unlike most mutual fund managers who tend to be permabulls because they can only buy stocks or bonds, hedgies can make money in falling markets by shorting securities. That makes them equally open to considering bullish or bearish scenarios.
It also makes them ideal candidates to forecast the year ahead. Will the market be better in 2012 than it was this year? Three prominent hedge fund managers weigh in.
Steven Palmer, president of AlphaNorth Asset Management Inc.
While many investors fret about European debt woes, high U.S. unemployment and a slowing Chinese economy, Steven Palmer says he is optimistic about what the new year holds.
"I believe the market will set new all-time highs in 2012," says the manager of the AlphaNorth Partners fund. "Once that happens, I will not be bullish any more."
Equities are now cheap, while the North American economy is reaccelerating, he said. "The S&P 500 is trading at roughly 12 times earnings, which is low by historical standards. … I think China is going to reaccelerate as well. We are going to have a global recovery, which will fuel commodities, and Canada is going to benefit."
Within resources, he likes the energy sector, and suggests that oil could hit $125 (U.S.) a barrel. He also likes iron ore and copper.
"To me, it feels like the end of 2008," he said. "Then, it was major [U.S.]financial institutions in trouble, but now it's countries in Europe that are in trouble.
"At the end of the day, the situation was resolved in the United States with TARP [Troubled Asset Relief Program] I think there will be a similar type of program for Europe that contains the problem."
Eric Sprott, chief investment officer of Sprott Asset Management LP
A well-known bear, Eric Sprott expects stock markets to continue weakening next year amid slower global growth.
"It wouldn't surprise me if the [U.S.]market was down 20 per cent," said the manager of Sprott Hedge fund. "I just look at the banking business, and it's just a mess all over the world. Everyone is too levered."
A global recession is possible because the Chinese and Indian economies are slowing, he said. "Those are the two biggest foreign economies. … I would expect that trend to continue unless governments come in yet again, and decide in essence to print money."
Mr. Sprott, whose fund is 70 per cent invested in gold and silver miners and bullion, is bullish on those metals despite their recent sell-off. Next year, "gold will punch through to new highs," he predicted, as governments continue to print paper money, fuelling worries over future inflation.
"I think silver will outperform gold next year," but its price has been weighed down by short sellers who have covered a lot of their positions, he said. "I think we are due for a bounce."
He is short the U.S. financial, home-building and consumer discretionary sectors. "It's all in anticipation of continuing weakness in the economic environment," he said.
Andrea Horan, portfolio manager with Agilith Capital Inc.
Andrea Horan says she is more bullish on the U.S. than the Canadian stock market next year.
"We could be looking for a double-digit return for the S&P 500," suggested Ms. Horan, who co-manages the North American Diversified Fund. "I would expect the TSX as a whole to underperform the S&P 500, especially in Canadian dollar terms, although I think it is still possible that we get a positive year."
The U.S. economy is starting to improve in terms of job growth, while the housing market seems to have stabilized, she said. "While people are concerned about their [U.S.]fiscal situation, I don't expect any crisis over the coming 12 months. … Both [political]parties are looking towards an election."
The Chinese economy is decelerating, and that will affect the resource-heavy Canadian market, she said. "It doesn't help that Europe is slowing as well. The offset is that we would expect the Canadian dollar to show signs of weakness … so a weaker Canadian dollar would provide some relief to the manufacturing base in Central Canada."
Financial, industrial and special situation stocks should outperform next year, while commodity stocks will struggle, Ms. Horan added. "One of the names we really like is Berkshire Hathaway. It is a great play on the U.S. economy, and is very diversified.
"In Canada, we like Peer 1 Network Enterprises, which is involved in hosting services for the cloud computing economy. We also like Corus Entertainment, which has high free cash flow, a growing dividend and very solid, protected business model."