Investors wrong-footed in 2011, says Stonehage’s Kim Hillier

Many investors are probably glad to see the back of 2011. Looking back, the predominant focus was of debts, defaults and deficits, says Stonehage’s Kim Hillier.

Amidst the tremendous volatility that ensued, it was certainly difficult for investors to consistently apply their investment strategy through the constantly changing ‘risk-on/risk-off’ macro environment and to successfully preserve their existing capital, let alone grow it.

Sharp market reversals were driven by lawmakers, regulators, central bankers and ratings agencies and the resultant fragile sentiment was further undermined by a multitude of other unpleasant shocks such as the growing Eurozone peripheral sovereign debt concerns, the earthquake in Japan, rising tension in the Middle East, inflation concerns building especially in the Emerging Markets, and so on.

The result was that many risk assets remained highly correlated and, in these stormy investment waters, safe harbour options appeared few and far between. The unintended consequences of these events meant that many investors found themselves wrong-footed and the intended outcomes of their chosen investment decisions blown off course.

While this unsettling environment was supportive of Treasuries, Gilts and Bunds, many investors had perceived little value in the very low or negative real yields these longer dated bonds offered, fearing instead rising inflation on the back of QE.

In hindsight, this proved an untimely opportunity cost as these particular investments continued to receive massive inflows and performed well in a very difficult climate. Global equities on the other hand, which had been thought to be both relatively and absolutely good value (especially when compared to bonds), fell in 2011 over 6.5% in US Dollar terms, with Emerging Market equities, despite their better growth credentials, down 18.4%.

For most, alternative investments didn’t provide any welcome refuge either. Hedge funds struggled in whip-sawing market conditions and many commodities (with the notable exclusions of oil and gold) also fell as risk appetite diminished on the back of China slowdown fears.

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