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It's pretty popular to compare investing in today's complicated, fast-moving economic and market environment to playing the old Whack-a-Mole arcade game, hammering down the unpredictable sequence of rodent invaders as they rise up in rapid succession. But the real money is made in avoiding being the mole that's blindsided by an unseen mallet.
A synthesis of the forecasts for 2012, as well as some of those supposed "top surprises for 2012" lists, suggests that the punditocracy is largely bullish on stocks (but mainly later in the year), especially so on U.S. stocks and particularly compared with Treasury securities. This crowd favors larger blue-chip equities and, with some exceptions, suggests that the European authorities will put together a convincing papering-over of their debt issues, if grudgingly and sloppily.
The consensus is not always wrong, for sure, so simply going against this rough collective view makes no sense. Yet here are a few possible developments that, should they arise, would be mallets applied to the heads of unsuspecting investors:
• Could big European stocks handily outperform U.S. indexes? It's become pretty commonplace to characterize the U.S. as a relative oasis (better growth, lower borrowing costs, reserve currency) in an upside-down world. With reason, of course.
Yet, the latest Bank of America Merrill Lynch global fund manager survey showed too many leaning this way. "The consensus is not positioned for good news from Europe and bad news from…the U.S.," say the Merrill strategists, and, "The gap between U.S. and European profit expectations is currently at a record." Michael Darda, economist at MKM Partners, notes that the Euro-Stoxx 50 index now trades below 10 times its five-year average earnings, versus 16 times for the Standard & Poor's 500, effectively pricing in the widely anticipated Continental recession this year.
This is not to suggest that the world is wildly optimistic about U.S. stocks. Brokerage strategists are milquetoast in their nominal bullishness. And, as the Leuthold Group noted last week, "the consensus seems to expect a weak first-half stock market, with some imperfect resolution of Europe's sovereign-debt crisis possibly triggering a better second half. A decent first quarter or first-half stock-market rally would shock most market participants."
Maybe so, but the weekly Consensus Inc. poll of pros is now 66% bullish (highest since May, when the market was near its post-crisis highs) and the majority surely feels the U.S. is the place to be for relative returns.
• Could the current "firm patch" in U.S. economic data continue long enough to lead the Federal Reserve to at least consider–or be perceived to be considering–somewhat tighter money down the road? A long shot, but one that would be a huge shocker.
• Is it possible that an Obama victory wouldn't, in itself, be unfriendly to market returns? Re-election of an incumbent is rarely jarring for financial markets and usually requires an improving domestic economy. And second presidential terms are about legacies, rather than heavy-handed policy-making. It's fair to say that this idea is outside the mainstream of Wall Street thinking.
LET'S ALL ADMIT IT, there's not really such a thing as a "safe" financial stock. If it's truly safe, it's not truly a financial, and vice versa. But Invesco (IVZ), the global asset manager that oversees $600 billion and has a market value exceeding $9 billion, comes pretty close. The stock, at 20.77, trades under 12 times consensus forecast earnings for this year and well below its sector average.
This, despite the fact that the company is more diversified across asset classes, fund types and geographies than the typical fund firm. For instance, nearly a quarter of Invesco's assets under management are in the growth areas of exchange-traded funds or alternative segments, such as hedge funds. Invesco has ready cost-cutting and sales-efficiency potential as it integrates its Van Kampen mutual-funds acquisition of 2010. A Morgan Stanley analyst last week noted that Invesco's fund flows, and thus its earnings prospects, remain more resilient than average.
Perhaps the one knock on the stock is that so few folks are knocking it. A hefty 17 of the 21 analysts that cover the company like it. Yet this is at least partly offset by the number of smart-money hedge funds counted among its largest holders. And, importantly, the sell-side consensus was equally upbeat when Invesco traded above 27 less than a year ago. That's where it could easily return if global markets remain steady.
E-mail: michael.santoli@barrons.com
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