As we painfully learn to delever our economies, the monetary values of all assets are slowly adjusting to their real values. As austerity bites, we will see a major political storm brewing as social problems and costs compound the economic hardships being forced upon individuals. Lack of decisive political leadership along with elections in several major economies will only exacerbate the problems and issues at stake.

As the debt bubble bursts, lenders will no longer be sure if the Governments will have a willingness or an ability to repay their total debt burdens as a ratio of their income (proxy is GDP).

Longer term, the omens do not look good.
 
2012 Themes and Ideas

Continue to focus on being broadly overweight High Yield and Investment Grade Debt, overweight defensive stocks such as consumer staples, healthcare and utilities. We would reduce our exposures to European Sovereign bonds and continue to remain neutral on gold and silver until a clearer technical picture emerges.

Surprises might come from stronger Chinese growth resulting in a strong quarter for Chinese equities and continued resilience on US earnings especially from the pharmaceutical and technology sectors.

Equities

Focus on global names with strong core earnings, low debt and high dividend payouts.
Increase allocations to Pan European companies with strong Emerging Markets exposure.

Fixed Income

Invest in US High Yield and EM corporate and reduce sovereign debt exposures in Europe.

Currencies / Commodities

Remain bearish on JPY as Japan joins the global liquidity race.
Look to diversify to NOK, SGD and CAD over coming months.
Stay clear of EM currencies especially INR.
For a more detailed analysis and a personal portfolio review, please contact us and we will be pleased to discuss.

Milan S. Morjaria
MSM Investment Advisors S.A.

3rd May 2012