Ten sectors investors should avoid in 2012
Investors beware: If you want big returns this year, don't put your money in developing countries, banks, or homes (including yours).
Investing is about making good choices. It's also about avoiding bad ones.Skip to next paragraph
Subscribe Today to the Monitor
Last month, we looked at nine investment themes for 2012. Here is my list of the 10 areas investors should avoid. In my view, we're in an age of deleveraging, which began in 2007 and probably has another five to seven years to run. Despite rising economic optimism, I foresee a moderate US recession, a hard landing in China, and a severe recession in Europe – in sum, a global recession in 2012.
1. Developed country stocks: This theme reflects my forecast of a downturn in global economic activity accompanied by financial crises of unknown depth. The United States and other developed economies are in a secular downswing that includes a secular bear market in equities.
2. Your house, second home, or residential investment property: If you plan on selling soon, do so yesterday. If I'm right and house prices have another 20 percent to fall in the next several years – after already declining 33 percent – this approach is obvious.
3. Home builders and related companies: Conditions now are far different from when home building was a growth industry characterized by lax underwriting standards, laissez-faire regulation, and, most of all, conviction that house prices would never fall. All those conditions have now been reversed.
4. Selected big-ticket consumer discretionary equities: With real incomes falling amid a continuing need to repay debt, I expect consumers to retrench this year – to the detriment of cruise lines, automakers, high-end consumer electronics, recreational vehicles, and resorts.
5. Consumer lenders: The consumer retrenchment and global recession I foresee will be bad for credit-card is-suers, who are still dealing with all the bad debt piled up in the borrowing-and-spending years.
6. Banks: Deleveraging and the carryover from past financial woes still plague major US banks and financial service institutions. I expect more weakness as deleveraging and write-downs persist in a recessionary climate. The downturn will affect banks here and abroad, big and small.
7. Junk securities: The slow-growth, deflationary scenario I foresee will be lethal for many junk bonds – both those issued as high-yield instruments by companies with shaky balance sheets and fallen angels that have been downgraded to junk status. Slow revenue and cash-flow growth will make it difficult for financially weak and weakening firms to service their debts.
8. Developing country stocks and bonds: The effects from the hard landing in China will spread widely from the world's second-largest economy and major commodity importer. Along with the likely major recession in Europe and economic downturn in the US, a severe slowdown in China will spawn global economic retreat, battering commodity- and export-dependent economies.
9. Selected commodities: I doubt that the commodity price declines in 2011 fully anticipated the global recession I foresee this year, so further significant declines are probably in store, especially for industrial commodities.
10. Many old-tech capital-equipment producers: Besides the depressing effects of excess capacity, low-tech and old-tech firms suffer from foreign competition that grows as their technology is transferred abroad. Challenges include: high-cost labor, lack of productivity gains, and saturated, slow-growth markets.
– A. Gary Shilling heads an economic consulting firm in Springfield, N.J. His latest book is "The Age of Deleveraging."