The tug-of-war between corporate fundamentals on the one hand and political and macroeconomic uncertainties on the other is resulting in a directionless trading.
Many share prices suffered substantial falls in 2011, but corporate profits held up well. This means that equity prices have become basically more attractive. Nor do analysts expect any collapse of profits in 2012. Nevertheless, downside risks still predominate at present. As the debt crisis continues, it is transmuting into a fully fledged crises of confidence. The repercussions on the real economy cannot yet be gauged. The equity markets are therefore likely to remain directionless for some time before new stimulus emerges.
In this challenging environment, US equities should be able to perform best. As soon as sentiment improves and investors become more risk-tolerant, other regions (e.g. emerging markets) will become more attractive again.
On a sector basis we prefer health care in Europe. Fundamental reasons as well as risk/return considerations emphasise the relative attractiveness of the sector. We finance our overweight by a reduction in consumer staples. In North America we still expect an outperforming IT Sector. The sector could benefit from sound balance sheets and high investment demand.
