With the new year we thought it might make sense to outline our major themes for 2012.
Theme 1: The U.S. economy will grow at a slower pace than its historical average
Comment: High debt, high unemployment, legislative gridlock, a weakening dollar, and an economy in transition as manufacturing jobs continue to flow overseas will cause the United States to grow at a slower rate. We expect overall GDP growth to be lower than 2.5% on average for the next several years.
Investment response: Selective equity investment with a focus on technology, healthcare, and certain financial service companies. U.S. equity assets with significant global revenue provide additional tailwind for earnings. Look at Oracle , Amazon , and Abbott .
Theme 2: Europe will struggle
Comment: Europe is essentially in the same boat as the United States but with a far more difficult state of affairs. A disjointed Europe is struggling to deal with the debt crisis and this will have lasting effects for years to come. Expect GDP growth in Europe to be slower like the United States and for Europe to enter a recession in 2012.
Investment response: For the most part avoid Europe and its lagging economy
Theme 3: Emerging market growth
Comment: Despite a difficult 2011, emerging markets are poised to rebound. With middle-class consumption rising and surplus economies having an inherent advantage relative to debt ridden economies, expect bounce back in emerging market growth as well as equity market returns. On the long-term one cannot reasonably argue that returns will not be higher as GDP growth continues to advance at 3 to 4 times that of more developed economies. Look at Singapore, Indonesia, China, and Malaysia.
Investment response: Cautiously invest in emerging market assets. Diversify among countries and regions and include South America as well as Asia in the overall allocation. While not an emerging market, Australia deserves a look as it benefits from emerging market growth.
Theme 4: Commodities will bounce back
Comment: Another asset class that had a difficult 2011 will likely bounce back as global growth and optimism begins to creep forward. While a long-term inflation hedge, commodities (for now) in a low inflation environment are a play on economic growth and recovery. Look at ETF assets like AGG.
Investment response: Invest in tangible assets such as agriculture, metals,lumber, and other hard goods. These assets will be in demand as emerging-market consumption increases. Higher demand equals higher prices and higher returns.
Theme 5: Gold will continue its bull run
Comment: Despite a midyear slump in 2011, gold still outperformed most assets for the calendar year. Many factors have contributed to rising gold prices including fear, central bank purchases in emerging markets, and increased consumption for jewelry from India and China. GLD is a good choice; avoid riskier mining company stocks.
Investment response: Gold should be a part of an investment strategy as a hedge against equity volatility as well as a play on emerging market growth.
Theme 6: Interest rates to remain low in 2012
Comment: We are modifying our perspective somewhat on the direction of interest rates. We believe that ultimately rates will rise, but for the time being the Federal Reserve is throwing overwhelming force at the GDP growth problem facing the United States. These efforts will keep interest rates low for the foreseeable future.
Investment response: Increased duration slightly as risks associated with interest rate increases are muted for the first part of 2012.
Themes Will Drive Strategy
These 6 themes are a few of the trends that will guide our investment strategy. Remember that time is needed for thematic adjustments to play out; time is necessary for results.
Michael Yoshikami, Ph.D., CFP®, is CEO, Founder and Chairman of YCMNET's Investment Committee at YCMNET Advisors. Michael is a CNBC Contributor and appears regularly on the network. YCMNET is a San Francisco Bay Area-based independent money management firm that provides fee-based wealth management services to institutions and individuals around the world. Michael was named by Barron's as one of the Top 100 Independent Financial Advisors for 2009, 2010 and 2011.