Market Overview

Fast Money's Terranova: Start 2012 Defensive

Joe Terranova, Chief Market Strategist for Virtus Investment Partners, regular contributor on CNBC's Fast Money, and author of the new book Buy High, Sell Higher, recently released his 2012 macro outlook.

In it, Terranova calls for headwinds in the first half of 2012, before markets rebound in the second half. He addresses global growth prospects for developed and emerging economies, the 2012 U.S. presidential election, commodities, treasuries, fixed income, and potential headwinds and tailwinds for the global outlook.

GUILTY UNTIL PROVEN INNOCENT

In his report, dubbed “Guilty Until Proven Innocent," he advises investors to remain defensive—a stance he has been advocating since the fall. Terranova cites a crisis of confidence in the global capital markets as the main reason behind the defensive approach.

Terranova expects the first quarter to have the highest risk for capital markets. He states that ‘risk-off' will continue to be the trade, as the European debt crisis will persist for some time.

GLOBAL GROWTH PROSPECTS

Even with global growth slowing over the prior year—from 5% in 2010 to 3.8% in 2011—Terranova expects the United States to grow at a fairly strong rate. He anticipates around 2.5% in 2012; however, Terranova anticipates that the Eurozone will grow under 1% and have a potential to slip back into a recession. He anticipates China to grow sub-9%. This would be the first time China's growth would be below 9% since 2001.

EUROPE

On Europe, Terranova foresees a potential recession because of the continent's attitude and lack of competitive equality among its 17 members.

However, he states that the European Central Bank still has a bullet left in its arsenal. That bullet being the process of capping yields at a specific percent, much like what the United States did in 2009. He concludes that even if the Eurozone slips into recession, he does not expect the United States to follow, because of the Fed's aggressive monetary policy and the strengthening of U.S. economic and consumer data.

CHINA

China's economy has slowed, and analysts are taking notice, slashing estimates for GDP growth. This is strengthened by the fact that the People's Bank of China cut reserve requirements back in November, so it is likely that the first half of the year will be relatively difficult for China. However, Terranova expects the efforts in monetary easing within the country will take a positive effect in the second half of 2012, and China will be lead in the global growth story.

Here though, one many raise a question about Terranova's outlook: if Europe has great potential to slip back into recession, and the continent is one of China's largest importers, how will China continue its stellar growth?

U.S. EQUITIES

Terranova recommends four sectors for 2012. He expects the U.S. consumer to be a “dominant” tailwind in 2012, bringing opportunities in consumer discretionary, consumer staples, energy, and technology.

The energy sector outperformed the S&P 500 in 2011, and Terranova expects the same for 2012. He is very positive on crude, and expects the price to rise in 2012. To hear more from Terranova, check out Benzinga's recent interview.

GOLD AND THE U.S. DOLLAR

Terranova goes on to say that a portfolio allocation in precious metals is warranted in 2012. Industrial metals like aluminum and copper will become a story in the second half of 2012 once China's growth begins to pick back up.

He states that the U.S. dollar is an important indicator to watch, as it strengthened to an uncomfortably high degree in 2011. However, he does not believe that will be the case in 2012. President Obama has a plan to double exports in 5 years, and a weaker dollar policy is the only way to achieve that.

CONCLUSION

Terranova concludes his report by stating that the global economy has drastically changed over the years, and investors ought to expect volatility to remain in the capital markets. He urges investors to “manage (their) risk and be active.”

Follow me on Twitter @bpilzner

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