So over a 2011 full of uncertainties and changes, many of which were political, the only correct reading of the macroeconomic map proved to be inadequate. Risk management dominated, and managed to counter the fall in the markets and, even though this prudence led to several upside points being lost in the technical rebounds of the markets, we are confident that in the long term it is a major plus point of our management.

Does this year promise to be better? Despite the still uncertain economic prospects, the two main themes of reduction of western countries’ debt and growth in emerging markets’ domestic consumption could constitute an environment that is favourable for the markets, especially as the world outside Europe is not doing so badly. There is significant upside potential for our assets. However, as this new year starts, we consider risk management to be the priority, first and foremost due to the European situation.

• The future of the euro is far from guaranteed.

  • Those who dreamt it up imagined it as the first step on the road to true European economic and political union. Their successors were lax or complacent, and put off the necessary structural reforms, hiding behind the illusory protection of a currency that brought them stability and a low refinancing rate. The day of reckoning has been approaching since 2010. And the response made in the many “last-chance” summits has failed to satisfy or reassure anyone. Only Germany’s economic performance is exceptional and in this European context deserves to be saluted. Can this performance continue while its main commercial partners are in recession and the global economy is slowing down? Probably not in absolute terms, but in relative terms the German situation remains enviable. It is the only country in the euro zone whose 10-year refinancing is at rates below inflation.

    At the same time Italy must pay 7% to its 10-year creditors, which is untenable. The ECB’s mandate must be extended, to provide a solid defence, giving the countries time to restructure. In any case, for 2012, euro zone base rates must fall again and the euro must be weakened. The structural reforms needed in the euro zone require devaluation first, which would at least enable the weakest countries to regain competitiveness.

    In this scenario, bonds would be supported by the presence of a primary buyer and a buyer of last resort, exporting companies by the weakening of the euro, and global assets by a decline in fears of a systemic risk which threatens to contaminate the global economy.

• Despite a domestic political crisis and initial contamination from the European crisis, the US economy has shown great resilience.

  • The recovery in the Japanese production chain has led to a significant burst of activity in recent months. Likewise, household consumption, although at the price of a burden on their savings (from 5% in late June to 3.5% in late November), has been a positive surprise since the end of summer. Despite a contraction in the public sector, the US economy therefore still seems to have some traction. However, the forces that contributed to this burst of activity are fragile. On the other hand, the reduction from 4.34% to 2.90% in 30-year government bond yields over the last 12 months could constitute a positive factor for the real estate sector, which is still moribund. The main risk for the US economy is political. The electoral battle has begun in earnest, and in this context any hope of reform seems to be out of the question. Any monetary support from the Fed appears to be ruled out at least for the first half of the year.

    Interest rates should therefore remain low and anticipated inflation moderate. A context that favours equities valued around 13x 2011 earnings remains attractive. The main risk would be an increase in the dollar, which would hit the corporate sector. Bear in mind that 45% of S&P 500 revenues are generated outside the United States. In this sense exposure to the dollar is a means of partially offsetting this risk.

• China and all the emerging countries must negotiate their soft landing with skill.

  • The western context should favour this soft landing. China’s anticipated growth will, however, remain close to 6%. Autumn saw the publication of significant information on the bursting of China’s real estate bubble and the consequences for its financial system. The slowdown in the Chinese economy and the government’s difficulty managing the excesses caused by the colossal reflation plan announced in November 2008 are a reality. The Shanghai and Hong Kong equity markets failed to live up to expectations because of an excess of credit expansion, a sometimes doubtful or inappropriate allocation of capital, and inflationary pressures which have lasted much longer than we expected and which have required significant monetary tightening.

    Rather than deny these problems, on the contrary we consider that they can now be overcome. What seems to be important, and is perhaps difficult to conceive from Europe, is that in China these problems will be resolved by growth and not by an accumulation of austerity measures. In 2012, nominal GDP growth should be close to 14% and growth in outstanding credit should be similar, between 7.5 and 8 trillion yuans. This will therefore be an economy that is going to continue to create wealth, at a sustained rate, but without excessive escalation of global debt. As regards real estate, we should remember that the government orchestrated this consolidation of the sector. Furthermore, we should not forget that China is still, and has been for many years, facing a housing shortage. The government has logically taken into account this present and future shortage and plans to build 10 million homes a year, prioritising and subsidising social housing. The construction sector is therefore not going to collapse and the best players in the sector will get out while the going is good.

    The redirection of emerging economies towards domestic demand and household consumption will continue and accelerate. Moreover, these countries have large margins of manoeuvre concerning monetary and fiscal support. Finally, the fall in currencies in the second part of the year and lower stock exchange valuations than those of developed markets are other factors which make both bond and equity investments in these countries particularly attractive.

    2012 will therefore be a rock ‘n’ roll year, during which risk management will retain all its importance, but it is a year when our international management of equities, diversified securities and bonds will have powerful performance engines that we will exploit with enthusiasm and passion. But I first wish you all the best for 2012.

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