Macquarie looks to earnings certainty
While cautiously optimistic on the US and recommending a shift back towards growth opportunities, Macquarie Private Wealth said certainty over earnings will be crucial to investing in 2012 and investors will need to maintain a conservative tilt.
Shares in many markets including the US and Europe look very cheap in terms of valuations, but that only holds up if earnings expectations are accurate, according to Macquarie Private Wealth head of research Riccardo Briganti.
If those expectations are incorrect, then those valuations aren't as cheap as first thought, he said.
So although Europe looks even cheaper than the US, earnings expectations in the US aren't likely to be cut further, so those supposedly cheap valuations have merit, Briganti said.
But in Europe gross domestic product growth is going down and earnings can slide further so there is more risk there.
Because there is a real risk of earnings dropping further, Briganti also recommended steering clear of consumer discretionary stocks in Australia, pointing out there is less volatility in consumer staples, telecommunications, healthcare and property trusts.
The issue in Australia is that the market looks cheap but there are some sectors where earnings are more certain than others, meaning investors still need to have a conservative tilt to their portfolios, Briganti said.
He predicted a bounce-back in resources on the back of strength in China but said there was greater volatility in this approach.
If the positive view on China was wrong, then those holding resource stocks could be hit hard.
Overall the most important investment lessons to take in to 2012 were to remember the risk/return trade-off, to maintain diversification on the sector level and on the international level, to maintain focus on both tactical and strategic asset allocation, and to regularly monitor and rebalance the portfolio so it continues to match the investor's needs, he said.
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