Deciding where to invest your money is never an easy task. Making calls on which asset classes are likely to perform well and what factors should be kept in mind is a challenge even in rising markets, but when the economic backdrop is so uncertain it can seem like mission impossible.
With interest rates at rock bottom levels and UK inflation running around 5 per cent, anyone who keeps substantial amounts in high street bank accounts will see the value of their holdings eroded, forcing them to consider other solutions – but everywhere they look there are potential problems.
Europe is still in crisis with the region's politicians at loggerhead over the best ways to solve the ongoing debt issues, while the ramifications of this year's other problems, such as the Middle East uprisings and concerns over global growth, are still making their presence present.
Unsurprisingly, stock markets have been all over the place. The FTSE 100 index was at 5,899.9 points as Big Ben chimed at the start of 2011. By the middle of December it was down to 5,529.2 – a fall of 6.3 per cent – although it had climbed as high as 6,105.8 at one stage.
So where does that leave us? To help us reach conclusions we have combined the thoughts of leading financial advisers, fund managers and economists that have given their predictions for the coming year and identified which asset classes they expect to generate the best returns.
What's in store for 2012?
It has certainly been a tough time with a "crippling inability" to create a constructive political backdrop to shore up economic growth having led to a crisis of confidence and intense volatility, according to Thomas Becket, chief investment officer of PSigma Investment Management.
"Both financial markets and our nerves have been battered over the last six months by a constant barrage of political uncertainty stirred up furiously on both sides of the Atlantic," he says. "Political ignorance, ineptitude and immaturity have been the only certainties of a truly unpredictable year."
It is not something he expects to change any time soon.
"With the Europeans unable to reach a conclusive agreement to their woes and a presidential election in the US on the agenda for next year, we sadly expect more of the same in the year ahead," Mr Becket said.
Trevor Greetham, director of asset allocation at Fidelity Worldwide Investment, agrees that investment conditions will remain difficult with short, violent economic cycles, driven by fiscal and monetary stimulus. Diversification, he believes, will make sense.
"We continue to favour bonds over equities," he says. "We also remain underweight in commodities, albeit overweight in gold. Within equity markets we favour the US as it has relatively defensive attributes and is the most likely to stimulate its economy."
According to Mark Burgess, chief investment officer at Threadneedle Investments, the uncertain outlook means it's not an environment in which to take significant risks, although he suggests that clever stock-picking will be enough to find attractive opportunities in fixed income and equities.
"Whatever happens to the eurozone, the prospects for growth in the developed West are bleak, with the invisible hand of deleveraging set to constrain activity for several years," he says. "We have now pencilled in zero growth in the eurozone and the UK for 2012, and 1.5 per cent for the US."
However, robust emerging market growth should help to balance the developed world. "Our core view is that equity markets are inexpensive even in a low-growth environment," he adds. "Company balance sheets are strong, many businesses are returning cash to shareholders and valuations are very attractive on a range of measures."
For fixed-income investors, the current environment makes it more important than ever to invest flexibly and strategically across global bond markets, argues Nick Gartside, JP Morgan Asset Management's international chief investment officer for fixed income.
"Strategic bond funds can take a global view in search of the most attractive markets and securities, irrespective of any benchmark, adapting their fixed-income allocations and duration exposures for the prevailing economic and market environment," he says.
"Investors need to be able to change their allocations and portfolio positioning in order to try and limit losses and seek out the most attractive valuations.
"With global bond market returns likely to continue to surprise in 2012, such a flexible approach could help investors to navigate these complex markets," Mr Gartside adds.
Which investment funds look attractive?
Darius McDermott, managing director of Chelsea Financial Services, believes equities could do extremely well if there's even relatively modest good news over the coming year.
Funds which buy companies that offer decent dividends, he suggests, could prove particularly attractive.
"If you're buying dividends then at least you're getting some money in and it gives you some downside protection," he says. "Funds such as Invesco Perpetual High Income buy those sorts of companies. We also like M&G Global Dividend and continue to like Newton Asian Income. All have had a really good year and we expect that trend to continue."
Patrick Connolly, head of communications at AWD Chase de Vere, believes equities – and, in particular, emerging market equities – are attractively valued and will rise in value at some point.
The big question, however, is whether they will do so in 2012.
There are two funds which he believes are worthy of investors' consideration: M&G Global Basics and JPM Emerging Markets. "The M&G fund has an excellent track record and invests largely in western companies that will benefit from the economic growth in emerging markets," he says. "JPM Emerging Markets is a diversified, emerging markets fund which utilises the huge investment resources of JP Morgan and will be able to buy cheaper shares following the market falls in 2011."
Stocks and sectors
Graham Spooner, investment research analyst at The Share Centre, expects the current market volatility to continue for as long as the eurozone problems exist, but is optimistic about the outlook for UK corporations with healthy balance sheets that generate significant earnings from overseas.
"The sectors we feel are worth recommending for investors are health care, pharmaceuticals and personal goods," he says. "Our stock picks for 2012, meanwhile, are GlaxoSmithKline, Kenmare Resources and Royal Dutch Shell."
Mr Spooner says the health care sector is heavily dependent on spending and consumer wealth which makes it potentially volatile as consumer sentiment can change quickly, and if money needs to be saved this is one of the areas that may fall victim.
"Demographics should also play an important part in any decision when buying within this sector," he says. "Emerging market consumers are becoming more affluent and healthcare more affordable and this is an area where big in-roads can be made."
Turning to the pharmaceuticals sector, he said: "By investing in some of the giants you can get attractive yields, along with stability created by share buybacks and large levels of cash generation. "Emerging market expansion will be key, especially in China and India which previously may not have been able to afford expensive – or even some basic – medicinal treatment."
On personal goods, Mr Spooner pointing out that the region currently accounts for 26 per cent of all spending on luxury items – a figure that's expected to grow significantly over the coming years.
"This sector is cyclical and likely to outperform in a bull market and underperform in a bear market," he explains. "It is suitable for those wishing to have a medium level of risk and looking for growth, as yields are lower than the FTSE 100 average."
As far as the stock picks are concerned, Mr Spooner says GlaxoSmithKline offers a good yield and he likes its expansion plans into the emerging markets and its diversified portfolio of products.
"It has suffered from a prolonged period of under-performance, but this changed in 2011 and we hope this trend will continue into 2012," he adds.
"Kenmare Resources is a titanium and minerals miner in Mozambique that may not be on many investors' radar, but has proven assets and is on the cusp of making a profit. There is also an underlying demand of its products."
Finally, there Royal Dutch Shell. "It currently has an attractive yield and dividend growth that is expected to remain high," says Mr Spooner. "The company's restructuring has gone well and lots of cash is expected to be generated from the investment phase in the next decade. It is also worth noting that its debt to equity ratio is low."
You need to consider an investment time horizon of at least five years, argues Geoff Penrice, an independent financial adviser with Honister Partners. Trying to time the market is very difficult, he argues, with people tending to get it wrong more times than they get it right.
"The world economy is still growing and there will be investment returns to be had, but there are still many uncertainties and risks which could derail things," he says. "When you invest for the longer term, short-term volatility is not very important."