The view for 2012 is cautious rather than catastrophic, according to Bill O’Neill, chief investment officer for Europe, Middle East and Africa (EMEA) at Merrill Lynch Wealth Management. “One of the potentially good news stories in the coming year is a stronger domestic United States economy. The worst-case scenario would be a run on European sovereigns leading to a run on the banking system.” He forecasts 3.7 percent global GDP growth in 2012, down from 3.9 percent in 2011, led by emerging markets.
O’Neill believes that decisions by policymakers will lead the markets in 2012 and he expects central banks to be more aggressive in terms of monetary easing, particularly in the Eurozone, and quantitative easing will become a global phenomenon. He stresses that “Europe needs to see itself increasingly as a single political entity and proper union.”
O’Neill is less compelled to buy into emerging markets than he was in previous years, as he believes that one needs to “dig beneath the surface to some of the sectorial stories”. He expects China to have a “soft landing” in 2012 and grow 8.6 percent down from 9.2 percent in 2011, but O’Neill won’t be buying Chinese equities as he finds more interesting emerging markets ideas elsewhere. He would keep an eye on China’s monetary policy and if it were aggressively eased, he would look to play that by buying into Russia, “despite politics issues and setbacks linked to presidential elections”, or Brazil, “which has been substantially de-rated”.
Regarding the Middle East and North Africa region, O’Neill believes that although it will be affected by the weaker global growth in 2012, the region will be more resilient as it enjoys high oil prices and big investment programs, such as those initiated in Saudi Arabia and Qatar. The Arab revolutions have “sensitized governments to the need to enhance social and communication infrastructure and get money out to the population. I think Qatar, Saudi Arabia and to a lesser degree Kuwait are the areas to focus on.”
Looking at Lebanon
On Lebanon, O’Neill is predominantly concerned with the high leverage. He is forecasting 3.8 percent GDP growth in 2012, up from 2.5 percent in 2011 but he warns that there are downside risks to the 2012 figure. O’Neill is concerned about the impact that the turmoil in Syria will have on Lebanon and whether it will also be slapped with sanctions. “What would affect my view on Lebanon in the coming year is… the knock on impact in Syria and the withdrawal of support from European banks and the effect it would have on the real estate sector,” he says.
When asked about investor sentiment, O’Neill’s view of global investor confidence differs from what Tamer Rashad, Head of Middle East wealth management at Merrill Lynch, says is the prevailing sense among MENA investors. O’Neill says global confidence has severely deteriorated. “Investors are worried about the outlook as they are not convinced with the incredible actions taken by policymakers. There is a lot of emphasis on capital preservation. The loss in faith in equity markets is very significant, and will take time to rebuild.” Rashad, on the other hand, tells Executive that, “Interestingly enough, confidence is very high relative to what is happening in Europe and the US. It is very high in the [Gulf Cooperation Council] and we have not seen a lack of confidence or decrease in confidence as a result of what is happening on political scenes across the region. Obviously for investors in Egypt or Tunisia it’s a different thing, but overall in the GCC confidence is very stable.”
As for his top areas of investments, O’Neill stresses on the potential surprise from the US domestic market. For exposure to this potential upside, he recommends the US dollar and large cap quality stocks that enjoy strong cash flows and that are exposed to secular themes such as emerging markets consumers. He favors the technology, consumer staples and consumer discretionary sectors. For a more risk-averse investor, he would recommend US investment-grade credit.
He sees limited upside to gold price in the first half of 2012, as he forecasts a price of $1,750 per ounce by June 2012, rising to $2,000 by December 2012. As for the oil price, he forecasts limited change in the first half of 2012 with Brent oil at $112 per barrel by June 2012 and then rising to $126 by December 2012.
For a more long-term investment, he would look to Africa although he acknowledges it is not for the faint-hearted. He likes their improvement in governance from a low base, the young demography with an increasing life expectancy and their access to natural resources.