Investing For Success in 2012

By Sheraz Mian

Stocks were all over the place last year, but finished close to the starting point. Should we expect more of the same?

Or, as some doomsayers never tire of reminding us, should we get ready for that day-of-reckoning stemming from problems in Europe and fiscal imbalances in the U.S?

I don't buy into those scenarios. In fact, I firmly believe that we entered 2012 in much better shape than in the last several years. Don't let the endless harangues from doomsayers about Europe and China scare you away from the stock market.

I am not brushing the problems under the rug; Europe's debt problems and questions about China's growth are real and remain a concern. But there are reasons to believe that we will have a lot more clarity on these issues in the coming months than was the case last year.

I am not someone who always sees the glass half-full. My sunny outlook for 2012 has a sound fundamental basis, which I want to share with you here. Suffice it to say, I see a lot better performance this year than what we saw in 2011.

What Will 2012 Bring?

Many of the issues that kept the market in check last year are still with us and will likely remain so through at least the first few months of the year. But I expect visibility to improve going forward, driving most of the gains for 2012.

Recessionary worries about the U.S. have eased, with the economy expected to grow a little over 2% in 2012. It is hard to get excited over that level of growth. But a 2% growth pace starts looking a lot more attractive relative to the outlook for the other major developed economies.

Importantly, this is plenty of growth for the corporate sector to sustain its profitability momentum. With the fourth quarter earnings season just getting into high gear, it is expected to show a lower growth rate than what we have become accustomed to in the last two-plus years. But that shouldn't be much of a worry given where we are in the earnings cycle. With margins effectively at peak levels and top-line gains getting hard to come by due to the relatively softer global economic backdrop, growth rates were bound to come down. And they have.

Using different valuation metrics, I arrive at stocks generating gains in excess of +10% from current levels this year. But I am not looking for a nice straight up move in 2012. In fact, I envision two distinct phases in the stock market this year, with each requiring its own set of investment strategies.


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