A Look Back At My 2011 Calls

by: Russ Koesterich, CFA

Last December, I shared my economic forecast for 2011, along with a series of investment calls. Nearly every Monday since then, I’ve been highlighting certain asset classes and market sectors in my weekly call posts.

So, how have my calls performed? All in all, most of my views were reasonably right. But, as I explain in my recent Market Perspectives piece, I did get some things wrong.

Back in December 2010, I expected last year to be characterized by anemic growth in most developed markets, stubbornly high inflation in emerging markets and lots of market volatility.

As such, I advocated overweighting equities versus bonds, overweighting developed markets (including the United States) versus emerging markets and maintaining a strategic allocation to commodities. I also was a big fan of overweighting global mega caps versus other market segments. On the fixed-income side, I favored underweighting Treasury bonds, and overweighting investment grade and municipal bonds.

Among the calls I got right, the United States did outperform the rest of the world last year and emerging markets did underperform developed markets. In addition, a broad index of commodities outperformed equities, mega caps outperformed an all-cap index and municipal bonds outperformed other bonds.

My calls to overweight energy and to underweight European banks also were right on the mark. By year’s end, investment grade returns were also outperforming - albeit narrowly - the Barclays Aggregate Bond Index.

On the other hand, I got the stock/bond call wrong as equities dramatically underperformed bonds last year (though I’m still a fan of stocks in the long term). My Treasury call was also dead wrong. Amid slower-than-expected global growth and extreme risk aversion, investors turned to Treasuries in 2011, believing they represented the only real safe haven asset. This was true even after the August downgrade of U.S. debt. At the same time, the timing was off for my call to overweight Australia.

As for my forecasts about the global economy in general, we finished 2011 somewhere between my baseline prediction of slow-but-positive growth and a double-dip recession. This was thanks to a number of unexpected events that acted as additional drags on an already weak economy. In 2012, I expect the slow growth to continue, but there’s always the chance of unexpected events once again.

Source: Bloomberg.

Bonds and bond funds will decrease in value as interest rates rise.

In addition to the normal risks associated with investing, international investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume. Securities focusing on a single country may be subject to higher volatility.

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