Investing in the New Year
By Kelly Kearsley
BBVA Compass's chief investment officer offers his forecast for the global economy and how it might affect you.
Though 2011 was an economic rollercoaster, the highs provide some encouraging signs for investors in the coming year. U.S. companies continued to post positive earnings reports and the country saw its first dip in unemployment in nearly two years. Still, the U.S. economy remains unsteady and the foreign debt crisis looms large, moving financial markets with every new headline.
Those trends are likely to continue, according to John Sawyer, CFA, Chief Investment Officer for Wealth Management at BBVA Compass. The following are his thoughts on the economy here and abroad, as well as the major themes investors can expect to affect markets in 2012.
Uncertainty in the Euro Zone. Volatility is the continuing theme as the European Union wrestles with how to solve its sovereign debt issues. That said, there is some good news as the 17-nation Euro Zone group has shown signs of agreement on broad reforms and the ECB is making substantive moves in supporting regional financial institutions.
Still, global investors remain wary of European government bonds, and the ability of some countries to pay their bills remains in question as do the consequences if they can't. The 17 core members of the Euro-Zone plan to negotiate new euro treaties in the months ahead. The result could bring some much-needed financial stability to the region, but Sawyer expects a bit more chaos before that happens. "With that many sovereign participants, the situation is rife for back-and-forth headlines on a day to day basis for a considerable time," he says.
Signs of hope at home. While the U.S. grapples with its own budget problems, Sawyer still sees cause for some cautious optimism. He expects a continuation of the encouraging earning reports that characterized last year (net income for the S&P 500 was up 13 percent from 2010 at the end of the third quarter).
Sawyer attributes the growth to more than just earnings management. "We're really seeing top-line sales growth flowing through to bottom-line growth," he says. "It's in large part due to the clean up companies did to their balance sheets in 2008 and 2009."
The trend bodes well for investors. The renewed focus by many companies on improving their operating leverage means that even modest revenue increases can lead to significant earnings growth, Sawyer says.
Politics and the pending presidential election will certainly dominate news cycles this year, but Sawyer anticipates they'll have little if any significant effect on investors. "While it's a very real topic, it's generally not one that has much of an influence on the markets as a whole," he says. "The bigger driver is earnings."
Emerging markets make their mark. Sawyer sees several areas of opportunity in emerging foreign markets. He's heartened by the economic growth of several developing countries, increased signs of transparency in those countries' financial reporting, and their healthy trade surpluses.
Investing amidst the global uncertainty is a challenge. BBVA has responded with a more defensive position, and Sawyer says other investors might consider doing the same. That means buying larger cap stocks with proven management teams. "We have a bias toward healthy balance sheets and companies that pay strong dividends," he says.
Economic volatility often creates more questions than answers. A financial advisor can provide both context and suggestions for what moves to make and when. "Times like these tend to lend themselves more to professional advice," Sawyer said. "We're here to help.
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