As the world moves into the start of 2012, it is only normal for investment circles all over to ponder on the likely economic cum market scenarios for the next 12 months.
Europe region, especially the countries facing a debt crisis, is stepping on the doorsteps of unemployment and recession. US has indicated signs of recovery, but not vibrant enough to rejuvenate for the moment. Asia overall appears resilient so far, yet prepared to face slower growth rates as it would be impacted somewhat due to the spillover effects from Europe and, to some extent, from US.
In the face of uncertainties still looming as a threat to the global economy, people with surplus liquidity would be considering how best to deploy their money – whether to play safe by putting all their savings in bank deposits, which could slowly be “eaten up” by increasing inflation in the long run, or divert part of it to investment assets for potential better returns but face some elements of risk, depending on the asset type selected.
Just a few days ago, I met up with my friend CS, who is in the fund management trade. We had our usual fellowship to share latest updates.
According to him, more big players and ordinary street investors are adopting a cautious approach. Shifting to bonds is noticeable. Pension funds have a preference for bonds to cater for more certainty and for matching their liability. Sovereign wealth funds go for mixed portfolios, with compositions depending on the market situations of the region. For example, European sovereign wealth funds have higher exposure to bonds compared to Asian ones.
As for the smaller investors, more are now risk averse and would want to minimize uncertainty and volatility. Therefore, bonds might be preferred over equities by many of them.
CS feels that bonds at this juncture are easier to sell in view of increased demand.
But just how stable are bonds in the light of the current uncertainties? CS illustrated to me his answer by citing Japan which has been experiencing low interest rate, recessionary growth and growing deficit. Take a look at the diagram (below) which shows an overview of Japan Corp vs Nikkei movements over 12 years from December 1997. With regard to Japan Corp (bond) movements, volatility was 0.6% pa while returns experienced +20% (positive whichever point you like to pick). For Nikkei, volatility was 6% pa and returns were uncertain (depending on which point you like to pick).
Bond has low volatility on one hand while on the other hand normally offers gradual but stable returns over the longer run. Equity exhibits high volatility, however returns can either be phenomenal or dismal – depending on the pickup point and disposal point selected by the investor.
CS feels his investment strategies for 2012 should go for selective G3 (Japan, US & Europe) and emerging market bonds.
In the Malaysian front, pundits seem to point to the trends of more bonds being issued and an uptrend view for equity market in the short term. Let us look at some points extracted from two local print media……..
(From a business an investment magazine):
· * Multi-million bonds are expected to be issued by big corporations like PLUS Bhd, MRT Co Sdn Bhd and JCorp.
· * A senior analyst of an investment bank said corporate bonds issuance is expected to be in the reach of RM60 billion in 2012. He does not foresee problems of absorbing the bonds because of the presence of EPF and other institutional investors. Demand will come from pension funds, insurance companies, financial institutions and asset managers.
· * When the equity market becomes cloudy, bonds serve as a good alternative.
(From the business page of a mainstream English newspaper):
· * Many fund managers and dealers are expected to buy in the stock market around December and January so as to present a better picture of their investment portfolios.
· * Actions should pick up in the first week of January when fund managers reallocate their portfolios for the commencement of a new year.
· * Factors that may pep up FBM-KLCI are the “customary” Chinese New Year rally and the imminent general elections to be held soon. “Related” stocks to the GE should see some price movements.
· * A senior analyst was quoted as saying that he expected the equity market to peak in January. Closer to March, he would start to take a bearish view.
All in all, I will conclude that the 2012 economic and investment overview for Malaysia will rest on two fulcrums – the Economic Transformation Programme (ETP) projects and the 13th General Elections and its outcome.
I would encourage you to scour for more sources of information so that you can make your prudent conclusion.
Best Regards. 
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