Saturday , 2 November 2024

Rosenberg: 7 Ways to Invest Given the Potential 8 Behavioral Changes Coming in 2012

The global economy is going to endure a significant deleveraging cycle as we move through 2012 – one that will affect most if not all parts of the developed world. It will be accomplished by some combination of default and write-downs, debt repayment and rising savings rates. [Below I outline 8 areas of behaviorial change to watch for in 2012 and 7 ways to invest in such a fluid economic environment.] Words: 1186

So says David Rosenberg (www.gluskinsheff.com) in edited excerpts from his original article*.

Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!), has further edited ([ ]), abridged (…) and reformatted the article below for the sake of clarity and brevity to ensure a fast and easy read. The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.

Who in the world is currently reading this article along with you? Click here to find out.

Rosenberg goes on to say, in part:

[2012] promises to be very deflationary and we will have to invest with that prospect in mind, and all the behavioral, political and social shifts that are bound to ensue. [First let’s outline] the eight areas of behavioral change to watch for in 2012 [followed by 7 ways to invest to preserve cash flow and capital, i.e. invest for safety and income at a reasonable price:

1. Extent of frugality on the part of the global consumer (living within our means; retirement with dignity)

For those who were betting on elevated portfolio returns to deliver adequate retirement savings, time has run out. They will have to save the old fashioned way at some point.

Up until now, it has been difficult to demonstrate a clear, broad-based trend toward frugality on the part of consumers. To some degree the “haves” are offsetting the behavior of the “have-nots”, but now that the equity wealth effect is over, the upper-echelon spenders are headed for the down escalator. The most recent resurrection of consumer spending this fall after a first-half lull clearly appears to have borrowed from the future when seen in the light of negative changes in household income and the plunging personal savings rate.

2. Extent of austerity on the part of sovereigns (spending cuts/tax reform)

It is difficult to unequivocally assert that the fiscal challenges in Europe are any worse than those in the United States but each country and region does have their own unique circumstances and challenges. What seems to be common is a relatively high degree of chaos.

3. Change in extent of nationalism (an umbrella for protectionism and isolationism: mean reversion for globalization)

Isolationism falls under the umbrella of nationalism, and so does protectionism. An increase in nationalism will mean that we will need to be extremely thoughtful in our selection of dividend paying stocks. Increased nationalism will impact trade, defense budgets, business costs, currencies, commodity prices and all the productivity factors that have made globalization such an economic positive, particularly in the post-Cold War era.

4. Extent of political movement along the ideological and fiscal spectrum (from gridlock to change)

The outcome of the presidential race may well be the most consequential development of 2012, if not the most important election since Reagan defeated Carter in 1980.

What we are most interested in determining is how rapidly politics, particularly in the developed world, can escape gridlock. Historically, secular economic peaks are accompanied by political extremes, and this time was no different. If politics can make its way from polarization toward the center, the outlook for economic stability improves dramatically, in almost every case.

The U.S., like much of the developed world, will be forced to find ever-creative ways to pay down accumulated debt. Inevitably “taxing the rich” and/or wealth confiscation cannot be ruled out, especially if social stability is threatened by lingering high rates of unemployment, particularly on the youth, adult males and the uneducated.

5. Geopolitical change (wars, elections and regime changes)

Already in Europe, seven governments have been toppled by the debt crisis; Greece and Italy are now run by caretaker technocratic leaders and a political crisis is brewing in Belgium. We also have French presidential elections this spring and Germans head to the polls a year later. The Arab Spring has unleashed rounds of instability, as evidenced by recent events in Egypt, Turkey, which has drifted away from the West in several crucial respects in the past year. Vladimir Putin’s renewed ascendancy in Russia can hardly be construed as a settling development. We will be looking for geopolitical improvement in 2012, even if that is not saying much.

6. Changes in inflationary/deflationary expectations

If a recession is in store for 2012, then the bear market in equities, real estate and most cyclically sensitive parts of the investing landscape has certainly resumed.

The dilemma for policymakers this time around is that they are out of bazookas. Perhaps 2012 will be the year when investors stop fearing inflation and instead embrace the more obvious fundamental conditions that are leading to deflation: declining credit in the face of ongoing expansion in the supply of goods and services.

7. Changes in growth expectations

We will be watching for evidence that consensus expectations gravitate toward acceptance that we are deeply entrenched in recession before we expect to see the next low in the equity markets and, conversely, the next (and possibly last) low watermark in bond yields. Because profit margins are either at cycle highs or all-time highs, even a mild economic contraction could end up exerting a powerful dampening impact on earnings growth.

8. Changes in asset allocation preference (fund-flows/de-risking)

Many investors increasingly want preservation of cash flow as well as preservation of capital. We concur and have consistently recommended a focus on S.I.R.P. — safety and income at a reasonable price, with a primary focus on stability and prudent risk-taking [such as the following]:  
  1. Corporate bonds with safe yield
  2. Equities with reliable dividend growth/yield; preferred shares (“income” orientation)
  3. Companies with low debt/equity ratios and high liquid asset ratios
  4. Hard assets that provide an income stream. They work well in a deflationary environment (ie, oil and gas royalties, REITs, etc…)
  5. Sectors or companies with… low fixed costs, high variable cost, high barriers to entry/some sort of oligopolistic features, a relatively high level of demand inelasticity (utilities, staples, health care — these sectors are also unloved and under owned by institutional portfolio managers)
  6. Alternative assets that are not reliant on rising equity markets and where volatility can be used to advantage.
  7. Precious metals. They are a  hedge against the reflationary policies aimed at defusing deflationary risks— money printing, rolling currency depreciations, heightened trade frictions, and government procurement policies.

For 2012, tactical strategies will be crucial…Investors should be making a special effort to fight dogma and keep an open mind in the coming year — looking to take advantage of both long and short opportunities…[It is] absolutely imperative to remain focused on high-quality investments with preservation of capital attributes, and to use the inherent market volatility that is part and parcel of every post-bubble deleveraging cycle to one’s advantage by becoming ever more tactical and opportunistic in long-short “relative value” strategies.

*http://www.zerohedge.com/news/rosenberg-8-areas-behavioral-change-2012

Sign-up for Automatic Receipt of Articles in your Inbox or via FACEBOOK | and/or TWITTER so as not to miss any of the best financial articles on the internet edited for clarity and brevity to ensure you a fast an easy read.

Related Articles:

1. What Works on Wall Street? James O’Shaughnessy Tells All!

investing
 
History has shown that investors who stick to disciplined, fundamental-focused strategies give themselves a good chance of beating the market over the long haul and one of the investment gurus who has compiled the most data on that topic is James O’Shaughnessy, whose book What Works on Wall Street became something of a bible for investment strategies when it was released 15 years ago. Now, O’Shaughnessy has released an updated version of his book, with a plethora of new data on various investment strategies. Using data that stretches back to before the Great Depression in some cases, O’Shaughnessy back-tests numerous strategies, and comes to some very intriguing conclusions. [Let me share some of them with you.] Words: 1345
 
 
a5321_market-analysis
 
[I am surprised at the large number of] investment professionals who confuse risk and volatility… regularly and thoroughly confusing these two concepts to the point where the terms are treated as being virtually synonymous. This has resulted in the flawed investment principle that reducing volatility will (and must) reduce risk. Such thinking is deeply misguided, and following it has dire consequences for investors. [Let me explain more about what risk and volatility are and are not.] Words: 110
 
 
investing4
 
People choose certain stocks for many different reasons – business location; sector strength; product innovation – but some investors choose what to buy based on company size, or market capitalization [believing that size does matter. Yes,] understanding the difference between small-cap, medium-cap and large-cap companies is the first step to making the right choice. [Let me explain.] Words: 600
 
 
investing4
 
The key to long term success in investing is understanding the difference between the “seasons” in the markets and the economy. [Let me explain the four “seasons” and why we might very well be in the “fall” season and, if that is indeed correct, why] it is time to pack away the summer allocations and break out the winter coats to hunker down for what may be a chilly 2012. Words: 1016