Short-term sentiment has driven markets at the expense of long-term investment thinking during a markedly volatile 2011 says HSBC Global Asset Management. But this has created what it believes to be a potentially attractive set of investment opportunities for 2012 for those with a longer-term perspective.

In its global outlook for 2012, HSBC Global Asset Management argues that frequent rotations in sentiment in markets reflect the fact that officials have been applying a ‘sticking plaster’ approach to addressing fundamental problems – acting only when faced with severe market pressure, and only then delivering just enough to stem the tide in the short run. Investors are therefore currently focused on whether European policymakers will be able to deliver a comprehensive long-term solution to deal with the eurozone crisis.

Given the risks to the outlook, many investors have flocked to ‘safe havens’ this year, forcing the gold price to record highs and high quality government bond yields to the lowest levels for a generation. This puts some government bonds in a position where returns are negative when inflation is taken into account, the report notes. On this basis, its clear long-term view is that equities offer the best value in 2012 even though short-term performance is likely to remain volatile. Many companies are in solid financial shape, having applied their own austerity measures. Balance sheet strength in turn supports the outlook for ongoing growth in dividends paid out to investors.

Olivier Gayno, CIO Wealth, CIO Liquidity, EMEA, HSBC Global Asset Management (France), said, “Economic growth is likely to remain under pressure in 2012. Although many European companies have robust finances, a lack of confidence has simply deterred them from investing. However, we believe that this ignores two key positive factors which point to a brighter long term future for investors: firstly, many firms based in the western world are increasingly benefiting from profits in emerging markets and, secondly, while the macro outlook for developed markets may continue to be a drag, emerging market equities look set to benefit from a much more supportive economic environment in the region.”

A combination of inflation and the industrialisation of emerging markets favour physical assets like property and commodities. A positive supply and demand picture also supports the outlook for commodities.

Olivier Gayno added: “We believe as global emerging markets continue to grow that there will be greater spending on domestic infrastructure. This, when coupled with an increase in personal wealth, will lead to higher levels of domestic consumption. These positive trends will reduce the long-standing dependence on exports and increasingly make emerging markets the guardians of their own destiny. Such powerful drivers, coupled with factors such as industrialisation and urbanisation as well as more robust fiscal positions than the West, underpin our longer-term positive views on emerging market equities. We continue to see stronger growth from the region in 2012 in comparison with developed markets, albeit that the rate of growth may slow somewhat when compared with recent history.”

Regarding Eastern European equities, the report outlines why HSBC Global Asset Management is positive about the outlook for oil and hard commodities in general. Olivier Gayno explained, “We favour Russian equities, where we see supportive fundamentals while equity valuations are also low versus their historic average, although political risk remains a source of market volatility.”

Equities are also attractively valued in Latin America on a price to earnings multiple of around nine times 2012 earnings. At the macro level, many Latin American countries are in better shape than developed market peers, with higher levels of consumer confidence and solid fiscal accounts. Fears around the continued strength of commodities have led to concerns about the risks to the outlook for this region but it is believed the likelihood of a crash similar to that seen in 2008/2009 is low. In the event of a prolonged downturn, these economies have tools at their disposal to deal with it, with ample room to reduce interest rates to stimulate the economy, for example.

Moving to the export-heavy Asian countries, the global slowdown has clearly had an impact but HSBC Global Asset Management still views the backdrop favourably, with economies offering stronger growth than the West. Inflation is showing signs of moderating and looser fiscal policies could help boost consumer demand in 2012, which would be positive for the region’s economies and equity markets. Within Asia, HSBC Global Asset Management favours Chinese equities where, in its view, valuations are attractive at present. The market is currently trading on about eight times’ 2012 earnings. Rapid rises in residential real estate prices could reverse and become destabilising to parts of the economy but it believes that a soft landing is the most likely outcome.