Investors were preoccupied with politics in 2012 focusing on risks in Europe and the subsequent actions of the IMF and ECB, the U.S. elections and the fiscal cliff drama. Company earnings were also an area of concern as growth rates in the U.S. and around the world slowed significantly. The Fed and the ECB pursued easy monetary policies to buy time until their economies got better. A possible Greek exit and Spanish bankruptcy was feared until Mario Draghi said he would do everything possible to hold the euro together and Mrs. Merkel agreed. A year-end spill over the fiscal cliff in the U.S. was averted, but substantial headwinds still lie ahead. Taxes are increasing for most taxpayers and businesses, the debt ceiling limit looms at the end of February and cuts in spending need to be addressed by March. The market took these issues, which are well known, in stride and U.S. stock prices moved higher, but most of last year’s uncertainties remain and others will emerge.
The silly annual forecasting season is under way. All the ‘experts’ are publishing their forecasts even though everyone knows that the chances of making accurate predictions are low. The past is prologue, but the future is unpredictable. The strength in the market so far this year seems to be factoring in the well-publicized concerns and a guarded optimism that the economy will strengthen later in the year with help from the Fed’s QE3 easing program. Nonetheless, more tax and spending issues have to be addressed and political gridlock is intensifying with a second term presidency and a new Congress.
Investors need to put economic and market developments in context to develop a useful perspective on the news. The key to successful investing is to have a thorough understanding of investments on an absolute and relative basis. Investors must also have the discipline to avoid paying an excessive price for a security in any area and to have the patience to hold for the long term.
Uncertainties are always with us so whatever the state of the economy and the market we construct portfolios that are sufficiently robust to weather cyclical trends. Each investment in all asset classes is selected on the basis of three key factors: quality, expected cash flow and, especially, valuation. As a result of this evaluation we continue to recommend an overweight to equity oriented investments and would underweight fixed income investments.
The investment time horizon and holding period for equities has been reduced drastically over recent years, as the majority of investors and fund managers have become preoccupied with short-term market volatility. This is understandable, but may be counterproductive to a sound investment program. A short-term orientation may increase the risk of not meeting your goals as there is a tendency to overreact to market volatility. True investors are long-term oriented and construct portfolios with their own goals in mind, which we believe should include preservation of capital in real terms, seeking a margin of safety through analysis and diversification.
These are uncertain times but uncertainty is not going away any time soon. Investors have to maintain a balanced perspective on the news and stick to their long-term objectives and the strategic program to achieve those objectives. Downside volatility can be the friend of long-term investors, giving them opportunities to add to their positions at attractive prices.
All of us at Whitnell wish everyone a happy, healthy and prosperous New Year.
Note: We have gathered the information contained in this report from sources we believe reliable; however, we do not guarantee the accuracy or completeness of such information. You should not assume that any discussion or information contained in this market commentary serves as the receipt of or as a substitute for personalized investment advice from Whitnell & Co. No part of this publication may be reproduced in any form, or referred to in any other publication, without express written permission.