Santa Claus Does Not Exist
So Santa did not make it this year. As always with stock market sayings, you should not rely on events unfolding in the same way every time and history tells us that the fabled Santa Claus rally is more myth than reality.
As I pointed out in one of my last columns of 2011, we tend to get one week of share price rises somewhere between mid-November and the end of December. Having had one such rally in November, there was no reason to assume that we would have another before year end.
The market continues to be torn between relying on fundamentals, with attractive yields tempting buyers every time the market falls, and the eurozone crisis, which scares off investors every time the market rises. So we do get the occasional surge lasting one or two days, such as the one that greeted the opening of trading in the New Year, but they are often wiped out.
All the factors that characterised 2011 are set to remain for most, if not all, of 2012. The eurozone crisis has not been resolved but at the same time yields on equities remain generally solid.
The big imponderable is the euro itself, which has remained remarkably resilient throughout the crisis. Although it has sunk back against the pound and the dollar over the past six months, the effect has been far from dramatic.
Having topped 90p last year, the euro is currently down about 10p but it is still worth around 82.5p and it has remained above 80p for the past two tumultuous years. It has simply pulled back from an unsustainably high level.
Those with longer memories may care to recall that it was once worth only about 65p. We have a long way to go to reach a new low for the single currency despite all the scorn of the British press.
Some sections of the press also seem determined to talk us back into recession. However, there are early signs that the services sector did quite well in December and we were spared the heavy snowfalls that caused the U.K. economy to grind to a halt in the previous two years.
I believe that when the figures come out we shall see very modest growth in the fourth quarter, perhaps just 0.1%, but growth nonetheless.
Welcome to the New Year. All in all, it is shaping up to be little different from the old one. Buying shares with solid yields, and buying them on the dips, was the best advice in 2011. It is the best advice for 2012.
Accentuate the Negative
One might feel, especially in tough times, that columns such as this should be highlighting the jewels among the dross, spotting the potential soaraway shares rather than warning against doubtful choices.
Not so. When the going gets tough, one should aim to invest in boring shares that plod on regardless. It is true that even in a prolonged bear market there will be a handful of shares that rise against the trend, and those who invest in them will earn the right to bore the entire pub with news of their financial acumen.
However, trying to pick such stars is a dangerous business and you are more likely to pick losers than winners. Stick to the defensives and live to fight another day. The stock market tables in any decent newspaper are littered with solid if unexciting prospects.
Given the breadth of opportunities, it is more important to highlight the shares you should stay well clear of. I was reminded of this when I saw a report that Eurasian Natural Resources Corporation (ENRC) had settled the legal action that followed its outrageous 'acquisition' of the Kolwezi copper mine.
ENRC paid $175 million to the dubious government of the 'Democratic' Republic of the Congo for the mining assets. It has now paid $1.25 billion to First Quantum (FQM), a Canadian rival that previously owned the assets, for the mine and some extra bits also in the Congo. The difference between the two figures shows who was in the right.
You may think that ENRC is a potential stellar performer, given that it has settled a bitter dispute and now has the undisputed right to mine highly valuable copper. But do you really want to buy into a company controlled by shareholders in Kazakhstan who have demonstrated scant regard for corporate governance, one that will be mining in a country that confiscates assets it has sold to one company in order to resell them to a rival?
Some people apparently thought this was all rather jolly, as ENRC shares rose when the case was settled. I would not touch them with a copper plated bargepole.
Rodney Hobson is a Morningstar columnist and author of four books, including How to Build a Share Portfolio. Each week Rodney provides his views on the latest market developments; the views contained herein are not necessarily those of Morningstar and should not be construed as financial advice.
