Swiss bank Credit Suisse recommends a diversified portfolio and tactical add-ons to generate returns in a challenging environment next year, the chief investment officer of its asset management and private banking business said in an interview.
Stefan Keitel also said the euro zone situation would likely stay the most significant risk for global capital markets in 2012, with the European Central Bank (ECB) seen playing a bigger role in helping calm jittery investors.
"Competition will stay high, margins are under pressure and the industry will remain challenging in 2012 but there is scope for some guarded optimism among the industry's top players," Keitel told Reuters.
Stock, credit and currency markets have been roiled this year by a sovereign debt crisis in the euro zone and the prospect of a global recession, resulting in a shift to safer trades such as US Treasuries, pushing yields to record lows.
But Keitel said that investors willing to play the anti-cyclical strategy could stand to benefit from opportunities arising from the crisis.
"From a valuation point of view, equity markets are quite attractive, in comparison to other asset classes, especially when you compare dividend yields to bond yields," he said.
Keitel added that investors should look to diversify away from government bonds to other fixed income classes. "Peripheral bonds, high-yield bonds, emerging market bonds and high-grade corporate bonds will give investors portfolio diversification and yield enhancement. You need government bonds but underweight and in a short duration," he said.
He also said that a more diversified currency strategy, with a reduced dependence on dollar and more emerging market or commodity-related currencies, would be the sensible option.
Investor risk-aversion stemming from the uncertain global environment -- the euro zone debt woes, macroeconomic imbalances and the risk of further deleveraging has spurred a trend towards a more liquid portfolio.
The strategy is most visible among private clients, Keitel said, who want to be able to act on 100 percent of their portfolios.
"They (private clients) want to have a leaner, cleaner strategy. So it's not the right time for complex, structured products, and other complex asset classes even despite the fact that these complex asset classes can add value to the portfolio."
Institutional investors however have a more long-term investment horizon, so can afford and are willing to deal with the broadest bundle of asset classes independent of their complexity, he added.
"They can deal with the illiquidity and they catch the illiquidity premium."
European Union leaders secured a agreement to draft a new treaty for deeper economic integration in the euro single currency area, but markets remained uncertain as to whether and when more decisive action will be taken.
European Central Bank (ECB) sources said the ECB intended to keep bond buying limited to around 20 billion euros a week for the time being.
"The situation in the euro zone will stay the main risk into next year," Keitel said. "Now the crucial question is whether the ECB will step in to become the so called lender of last resort? We think that when the politicians make the necessary steps, the probability is high that the ECB also will help out.