Up Trade in 2012?

Terry Flanagan

It’s the start of a new, better, year, according to some buy-side market participants.

A key, prevailing theme for global markets in 2011 was volatility. This year’s trading foreshadows more of the same, but tack on historically low global interest rates.

“It’s a tougher call to get average returns. Stocks prices are much more volatile than you’d expect,” said Ed Keon, managing director and portfolio manager for Quantitative Management Associates. “Our portfolios are trading close to their benchmarks but we’ll have a better year this year.”

With regard to equity performance, we’re more likely to be surprised on the upside versus the downside, according to Keon.

Keon’s optimism may be boosted by a January 3 stock rally—the first trading day of 2012. The Dow Jones Industrial Average closed up 179.82 points at last Tuesday’s close. Yet, cynics that believe ongoing volatility will spur more negativity are quick to cite the Dow’s mid-day trading downturn of .04%, yesterday.

Despite the index’s overall performance, Keon told Markets Media that a re-emergence of strong corporate fundamentals for selective companies will spur overall growth for the equity markets–a theme which has been steadily rising since the financial crisis of 2008.

Keon commented that companies are following the “residual income model”—which means a healthy stream of dividend payments for investors, but more importantly, a renewed sense of re-investment into businesses to help promote growth, and ultimately, higher stock prices.

Such a model to predict equity market behavior is not new—and Keon is adamant that many factors about the equity markets will remain constant, such as single digit gains of five to ten percent.

Of course, global equity market performance, especially that in the U.S, is largely reliant of Europe’s big pink elephant in the room—its sovereign debt crisis and subsequently linked recession.

The region’s sovereign debt crisis will also unfold positively, though modestly so, noted Keon.

“The people of Germany have their self-interest in mind but don’t be confused that this means a lack of resolve,” he said. “They’ll do what it takes to preserve the Euro.”

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