Andrew Morris, managing director of Signature, believes there may be more trouble ahead for the markets this year.

Offering his investment outlook for the year ahead, Morris said: “The second half of 2011 was one of the most volatile periods witnessed in many years. Markets far too regularly saw substantial intraday corrections.

“Much of this volatility was a consequence of the actions and inactions of politicians and central bankers. Looking into what seems a very murky and uncertain crystal ball for 2012; in the near term, one can reasonably and frustratingly expect more of the same.

“Planned political changes during the year include elections in France, USA and Russia as well as the leadership handover in China. In addition, the march of democracy in the Middle East may well spread to other authoritarian regimes in the world. As citizens seek regime change, the long term effects of this would hopefully be positive; nevertheless it may well be a further source of short term uncertainty.

“The dominance of the eurozone issues are likely to be maintained at least in the near-term, with the substantial amounts of debt that must be raised in the first quarter of the year by both European Sovereigns and the banking sector, the most notable of which is Italy.
“Together, these two events will likely once again test the foundations of the eurozone and perhaps crucially, the resolve of European Central Bank President Mario Draghi.

“Whilst his actions to date have emphasised the importance of not financing profligate member states and steadfastly following the prescribed role of the ECB, he may well find himself forced to make the choice between the single currency or a reassessment of his principals, particularly with regard to quantitative easing.

“Recession over large parts of Europe now seems highly likely and consequently Mario will probably pursue further interest rate cuts, in addition the European outlook will probably see continued weakness in the currency.

“Data from the US during the final quarter of 2011 was on the whole reassuring; it was particularly encouraging to see what appear to be early signs of a bottoming in the housing market. It will obviously be preferable for Obama to fight the presidential election with a robust economy. Indeed this would appear a probable scenario, despite the twin issues in the summer of the US debt downgrade and the deficit ceiling fiasco.

“The fact that the economy has performed as it has, in the face of so many challenges with a notable lack of help from Washington given the deadlock between the two parties, shows its resilience. Surprisingly, at this point Obama would seem to have a reasonable chance of serving a second term as President, not necessarily by him winning the election but more likely as a consequence of the Republicans losing it through their failure to field a creditable candidate.

“China remains a concern, and whilst signs that the economy is beginning the transition into a more consumer orientated one are encouraging, both a general slowdown and speculation in the housing market present a real problem for the authorities who must appease what are effectively conflicting issues, with one necessitating supportive Government policies and the other requiring tightening.

“Japan remains something of an enigma, with net debt one of the highest in the OECD coupled with the worst demographic profile of any of the developed world, it now issues more debt than it collects in taxes. Yet in spite of this it is able to able to issue 10 year bonds at a yield of circa 1%, surely it can only be a matter of time before the bond market loses confidence in what looks an unsustainable situation.

“2011 will be remembered for political change, particularly in the Middle East, and there is every reason to expect this to be continued in 2012. Recent protests in Russia following the sham elections in November as well as the continued unrest in Syria are likely to continue to impact on local markets and potentially on global sentiment.

“One of the more overlooked protests of 2011 was in Israel which saw the largest proportion of any population during the 12 months take to the streets. The continued pursuit of harsh austerity measures particularly in the peripheral European nations, coupled with exceptionally high youth unemployment will require very careful handling by these nation’s leaders.

“According to the Bank of England inflationary pressures in the UK are set to dramatically ease, as the effect of last year’s tax increases progressively drop out of the figures. As a consequence the squeeze on real incomes that UK consumers have had to deal with should diminish and should make for a more optimistic outlook. Consequently, it is unlikely that the UK will see interest rate rises during 2012.

“A continued pursuit of broad ranging austerity measures will also necessitate the offsetting stimulus of continued loose monetary policy. Gilt yields at record lows present something of a quandary for investors, the fact that the Bank of England has been such an aggressive buyer, holding up to 30% of the total Gilt market clearly distorts any analysis of yields at present. It does, however, make refinancing the nation’s debt a more attractive proposition in terms of the on-going cost!

“There remains substantial forced regulatory investment demand from the banking and finance sectors, this coupled with the maintenance of the UK’s “safe haven” position should result in only a slim probability for a dramatic move upwards in gilt yields.

“Equity investors should take particular heart from the health of the corporate sector. This largely continues to enjoy record margins, substantial cash balances and increasing dividends. That said we should be alert to the fact that margin pressures will surface at some stage, therefore to continue to grow profits, sales growth will have to dominate.

“In summary it would appear we are set for another challenging year and in such an environment, diversity and patience would appear worthy bedfellows for investors. Yet we feel that there could be a markets rally in the summer, led by a certain sporting event being held on these here shores...”