This will be an OK year for long-term investors

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With the market having the biggest down day for some time, it is timely to ask what the year ahead looks like. I know it’s a big job trying to predict some of the hardest-to-forecast variables – such as the course of stock markets, the growth of volatile European Union (EU) economies facing recession, and the unpredictable fortunes of governments in these troubled times – but someone has to do it, so why not me?

My market outlook

Let’s start with the easy, but most important bit: what will happen to stocks for 2012? I think the balance of historical, market and statistical evidence says it will be an up year. I think there will be the usual test of the market in May, but there could be bigger tests over February, as we are seeing now, and over March.

In March, we are expecting to see EU members and the European Central Bank (ECB) sign-off on the fiscal discipline commitment, and the other debt-rescue bodies are expected to add liquidity to the economic picture.

At the same time, local banks will be rolling over some pretty big debts and so the direction of interest rates ideally would be down.

Bears I know, such as Geoff Wilson of Wilson Asset Management, expect a big rebound when the worst is behind us, but Geoff’s figuring tends to be that we might need to get to 2013 to see it happen. That could easily end up being late 2012 if all the ducks line up nicely over the year.

Early signs are pretty good with Europe’s economic contraction for the December quarter coming in at 0.3% instead of the 0.4% expected. Helping this better-than-expected picture were the big economies of Europe – France and Germany – with the former actually growing rather than going backwards.

Thomson Reuters says these numbers have led to some positive revisions for 2012 growth. This is how the news agency saw it: “Economists at Credit Suisse raised their forecasts for eurozone GDP (gross domestic product) for 2012, and now predict that it will be flat rather than shrink by 0.5%.”

But it wasn’t all good news.

“Still, struggling Italy, the third largest economy in the euro region, fell into recession with worse-than-expected GDP shrinkage of 0.7% from the previous quarter,” it reported.

Challenges remain

The big challenges for stocks again could be political with elections in France and Italy and these could have implications for debt repayments and sovereign bond yields. Fortunately, I expect to see Europe being thrown a liquidity lifeline and that could counter political negativity.

Also, China outlined a commitment yesterday to invest in EU debt and that was another positive sign. If you throw in the election year in the United States, which generally coincides with a good result for Wall Street, then it builds a case for optimism.

As you can see, the European challenge will create anxiety points that will hit share prices over the course of the year and probably build a better case for stocks in 2013, but for long-term investors in quality companies, I suspect 2012 will be an OK year at the worst.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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