2011 was a difficult year for investors as markets were subjected to an onslaught of bad news emanating primarily from Mother Nature and “politicians”. Surprisingly, the economic news wasn’t all that bad, other than a mid-year slow down. The havoc unleashed by Mother Nature and the inability of “politicians”, both in the U.S. and Europe, to act decisively in addressing government credit problems was more than enough to send markets back into panic mode. The uncertainty created by the political bickering worsened what was already a big credit problem in Europe and weakened the already bruised business confidence both domestically and abroad.
In a more confident environment the economic weakness emanating from government austerity programs could be offset by business expenditure and capital investment, but the high level of uncertainty has hindered business confidence and market appetite for risk taking. Markets can deal with bad news, its uncertainty they don’t like. As we approached year-end some of the dark clouds were beginning to part.
On the economic front, economic data was improving in the U.S.; the developing economies, which had been tightening were beginning to loosen monetary policy to stimulate growth. In Europe the ECB had found a mechanism to provide ample liquidity to all European banks (reducing the specter of a financial contagion emanating from the banking system). On the political front it appears as though the rhetoric out of Washington has peaked at least for now!
Corporate profits continue to be robust and balance sheets strong putting equity valuations at attractive levels. The direction markets take over to the coming year will ultimately be driven out of Europe. We believe that Europe will “muddle through” to a solution, as a breakup of the European Union would put all countries involved in a worse position. It is in no-one’s interest to have the European Union dissolved.
While risks remain, we believe that the markets have priced in much of the downside. We will maintain our approach to the markets keeping a vigilant eye on the proceedings in Europe, the USA and the global economy.