With the stock market eking out meager gains, cash offering historically below average returns and inflation ending the year outside the 3% to 6% band, 2011 presented quite a disappointing year for most investors. The question now remains: what does 2012 have in store?

While the recent stock market rally may be cause for cautious celebration, the reality remains that, at current trading levels, the market has really only returned to the levels of three years ago. With the global economy still depressed and deep-seated structural issues still prevailing, it’s difficult to predict where future earnings growth may be generated.

It is als  worth considering the fact that South African equities could underperform developed market equities in the foreseeable future. While this has only happened twice in the last 11 calendar years (in 2008 and 2011), in both instances the underperformance was driven by concerns around global growth. The South African economy is sensitive to the poor headlines in Europe, and not as attractively priced on valuation grounds.

Due to the fact that the Monetary Policy Committee (MPC) left interest rates unchanged at 5.5% at its MPC meeting in January cash rates are likely to remain at multi-decade lows throughout 2012.

In 2011, an investment in cash not only lost its local purchasing power (i.e. the return from cash was insufficient to compensate investors for inflation), but it also lost international purchasing power on the back of a significantly weaker rand. With domestic growth under pressure and the South African Reserve Bank reluctant to hike interest rates in the near future, the low rates currently prevailing are likely to remain for some time yet.

Most analysts are further expecting inflation to remain outside the 3%-6% band for most of 2012. In this respect, South Africa is different from much of the developed and emerging world, where inflation has already peaked. Higher local inflation will place both our currency and bond yields under pressure.

And it is not yet clear how the economic turmoil in Europe and the US will be resolved.

However, investors should also not ignore the opportunities in offshore markets. If investing offshore is too daunting to do alone, investors can take advantage of investing with a local manager who explicitly takes on offshore exposure themselves. These managers carefully weight up the volatility risk of investing offshore, especially when measured against a local benchmark.

Remaining in cash looks a bit like a a poor alternative, especially after taking inflation into account, it looks increasingly clear that cash rates both here and abroad will remain low for longer than initially anticipated.

Investors should also be realistic about their ability to trade opportunistically in these volatile markets, and be wary about deliberately positioning themselves in anticipation of any particular event.

Should markets move against such expectation, investors will have insufficient time to react appropriately and will bear the brunt of accompanying losses. Delegating this decision to a professional manager or multi-manager might make more sense.

Investing in these uncertain times can seem intimidating, even for sophisticated investors, but fortunately, local fund managers with the appropriate benchmarks are equally concerned with generating real returns from their investment portfolios.

Investors in such portfolios need to persist with their investment strategy in 2012 despite reading troubling headlines in the newspapers concerning the global economy. Given where 2011 left us, they also need to be realistic about the returns that can be generated from this point onward.

These are the views of PPS head of Research David Crosoer.

Tags: #Inflation, #MPC, #PPS