Buying in the belief Europe is safe would be very risky. Photo: AFP
THERE are quite a few questions on my mind as I prepare to tidy my desk and head off to the beach for the summer break. Whether Australia's once-mighty cricket team can settle on a batting combination that gives it a hope of beating anyone, for one thing. At what point ageing baby boomers will realise that they no longer look cool wearing T-shirts with messages, tatts and Converse canvas sneakers, for another.
The list goes on. Why do people still wear watches when their phones track the time, connect to their diaries and organise their schedules with relentless precision? Why are people willing to queue to get into restaurants that deliberately create a faux buzz by refusing to accept bookings? For that matter, why are beetroot, pork belly and quinoa so hot right now? And why is Apple considered the most tech-savvy company in the world when its first iPhone didn't even multitask, and it has only this year worked out that people want to hold their books, music and data in a cloud instead of on their hard drive - something Amazon worked out years ago? Will anyone also come up with an internet security feature that makes the current confusing mess of passwords a thing of the past?
But in the markets there are more pressing questions. It's trite but true that investors are at a crossroads. They always are, of course. But right now investors are bearing down on the equivalent of Kew junction with the traffic lights out. Here are some of the questions that need to be answered in 2012.
■Is Europe safe? Buying in the belief that it is would still be very risky. Steps already announced or in train might keep the bond markets at bay, laying the ground for market gains. But if they fail, there could be ''a much worse outcome involving a severe contraction in the European economy (and) global effects, notwithstanding the capacity of the authorities in Asia to apply more stimulatory policies'', to quote the Reserve Bank's December minutes.
European sovereign debt yields have eased from highs set in November, and the European Central Bank is now lending Europe's banks as much three-year money as they want, at an interest rate of 1 per cent. Last night it said banks had subscribed for loans totalling €489.2 billion ($A637 billion) - cheap money will be partly used by the banks to purchase higher-yielding European government bonds, pushing bond prices up, and bond yields and sovereign borrowing costs down.
Stacked against that is that Europe is already in recession. Investors need to bankroll around €400 billion of sovereign debt in the first quarter of 2012 regardless, and the risk of contagion through a downgrade of France's AAA debt rating is growing. France is one of a handful of European Union AAA-rated nations guaranteeing Europe's main bond-buying defensive fund, the European Financial Stability Facility, and the fund's €440 billion firepower would be cut to about €293 billion if France were downgraded.
Even if this short-term pressure clears, Europe must negotiate a tighter fiscal union - early proposals set targets for fiscal austerity that are politically impossible and possibly counterproductive - and then begin paying down debt. The whispered fear in the markets is that even if all occurs, Europe will be ex-growth for a decade or more, as government economic support is rationed, and as Europe's low birth rate and ageing population undermines demand.
■Can China land the plane safely? The next most crucial question. Inflation in China eased as hoped in the fourth quarter, and after tightening credit all year, Beijing eased bank reserve requirements at the end of last month, boosting bank lending power. That came after a slowdown in industrial activity that raised fears of a hard landing: economic data in the first quarter of the new year will test whether Beijing loosened the reins in time.
■Is the United States recovering? Yes, actually. Stronger fourth-quarter data suggests that America's economy could expand by about 2.5 per cent in 2012. But like the rest of the world, the US is exposed to Europe's crisis, in the markets, and through trade.
■The $A - up or down? It is a proxy for global growth and commodity prices, and it will be pressured if Europe's crisis worsens, or if China slows too much, to 7 per cent GDP growth or less. Commodity prices have fallen by enough already this year to make parity with the US a moot point. Gold is up 14.5 per cent this year but 14.4 per cent down from its year high. Aluminium is down almost 5 per cent this month, and down 18.5 per cent this year. Copper has fallen more than 5 per cent in December, and by about 22 per cent in 2011. Iron ore, our biggest export earner, is steady this month, but down 22.4 per cent for the year.
Commodity prices are still high enough to support the resources boom, however - HSBC's economics team estimates that mining investment that is unlikely to be reversed will account for about two-thirds of Australia's economic growth in 2012. And a lower dollar would assist Australia's non-resources sectors, including manufacturing and retailing, by boosting international competitiveness.
■If there is a recovery, what to buy? Maybe the miners. BHP shares are down 23.5 per cent this year when the Australian sharemarket as a whole is down 13.8 per cent. Rio is down 28.8 per cent, Newcrest is down 23.5 per cent and Fortescue is down almost 32 per cent. The big miners will roar back if the news in the new year from China and Europe is positive.
But there is so much uncertainty at the moment that it's best to wait for clearer signs before moving.
