In the winter 2012 edition of its Investment Quarterly, asset management firm Neuberger Berman outlined 10 trends the firm expects will play out over the coming year. From uncertainty in the United States to uncertainty in Europe, there are a lot of moving parts for investors to keep their eyes on.
Global pressures play a significant role in the direction of the economy in 2012, but the hot political scene at the moment will have to cool down before investors can really understand how moves in Washington, D.C., will affect them.
1. Prominent politics: Impactful in Europe, but mostly noise stateside
The 2012 election cycle will cast a long shadow, according to Neuberger Berman. Key investment issues like budget and tax reform will have to wait until we know who’s taking the White House. In Europe, on the other hand, politics and intra-governmental pacts should help soothe the sovereign debt crisis and influence investment returns in both the fixed income and equity markets.
2. Obama wins second term
Despite the election overtaking interest in investment-related issues, Neuberger Berman is confident President Barack Obama will win a second term. The firm notes that history is not on Obama’s side, though. In the past 13 elections, no president has been re-elected with an approval rating below 48% and unemployment above 7.4%, according to the firm. Obama’s approval rating is currently 43% and the Fed projects an unemployment rate for the end of 2012 of 8.6%.
In spite of this, Neuberger Berman believes Obama has had enough successes (e.g., nine straight quarters of economic growth, 22 consecutive months of private sector job gains, the death of Osama bin Laden, Libya) that Republicans’ difficulty finding a candidate to unify behind will not be enough to defeat him at the polls.
3. U.S. economy avoids recession
“We do not have strong hopes for the economy,” Neuberger Berman writes, but it’s not as bad as it sounds. Things are bad, but the firm believes the country will see growth between 1.5% and 2% which will be enough to keep the United States out of recession. In other good (ish) news, the company is expecting steadier growth over the next 12 months, partly due to improvement in the labor and housing sectors.
4. European sovereign debt crisis reaches tipping point
European Union leaders are expected to adopt a new fiscal pact in March that will improve coordination among individual countries’ economic policies. Neuberger Berman is confident this can happen and writes that while there is still much to be done, Germany, France and policymakers at the European Central Bank, have the “power and the will to keep the euro bloc intact.”
5. China experiences a “soft landing”
On Nov. 30, the People’s Bank of China cut its reserve requirement ratio by 50 basis points, signaling, according to Neuberger Berman, that the country is ready to defend growth there, even as Europe’s debt crisis worsens the outlook for global trade. “We believe this policy move, and those that follow, will allow China to avoid the much-feared ‘hard landing,’” the firm wrote.
6. Broadening global monetary easing cycle
Several central banks have adopted “accommodative policy measures,” including the Central Bank of Brazil, the Reserve Bank of Australia and the European Central Bank. Further easing in developed economies and emerging markets should aid global growth and support commodities and emerging market equities and debt in the year ahead, Neuberger Berman writes.
7. Favor high-quality equities
The company is looking at large-cap U.S. stocks, like Johnson & Johnson, with strong global footprints, diverse sources of revenue and exposure to faster-growing emerging economies. “Although periods of near-term volatility should be expected, we believe an improving economy and positive (albeit slowing) earnings growth will provide a better backdrop for large-cap U.S. equities in 2012,” Neuberger Berman writes.
8. Income-oriented assets to offer attractive return profile
Neuberger Berman also looks favorably upon master limited partnerships and high-yield fixed income investments. These asset classes provide opportunities for upside potential in the event of a dramatic turnaround in the economy, but if not, they are an “attractive source of income.”
9. Geopolitical tensions to remain elevated
Between the death of Kim Jong Il in North Korea, claims of election fraud in Russia and ongoing conflicts with Iran, the geopolitical scene is hardly quiet. However, Neuberger Berman writes, as long as these situations remain relatively contained, investors’ attention will be consumed with the European sovereign debt crisis and China’s growth outlook.
10. Sector rotation continues to be pivotal
The energy, information technology, consumer staples and health care sectors provide a good hedge to the twin risks of heightened volatility and elevated correlations, according to the firm. “Their exposure to faster-growing markets and strong underlying demographics should help these sectors offer an attractive return profile for the year ahead.”
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