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Most investors expected 2011 to be another year of recovery in global markets. What happened?

Overall economic growth was less robust than investors expected going into the year. Most measures of economic health, including employment growth, consumer confidence and housing were relatively stagnant. By summer, the rating agencies reacted to this by downgrading the debt of several countries, starting with the US in July. This negative political/economic sentiment and heightened concerns over the Eurozone’s inability to address the debt problems in some member states, notably Greece, overshadowed the fundamentals in the securities markets through yearend.

What are your expectations for markets in 2012?

We are cautiously optimistic. The concerns surrounding much of the negativity that pressured stocks in 2011 have eased and investors have begun the year more bullish. Corporate profit growth, which drives stocks, is expected at between 5% and 8% this year. Investors typically put a higher valuation on profit growth in a climate of reduced uncertainty, which would give stocks a further boost.

What are your expectations for economic growth in 2012?

This looks like another year of modest global growth. Heightened austerity measures in Europe, and less monetary stimulus from the Federal Reserve in the US, are likely to limit GDP growth in developed western markets to between zero and 2% overall, with Europe toward the low end of that range and the US toward the high end. Developing markets should do better than more mature regional markets, but growth rates are likely to trail their historic levels.

What does this mean for interest rates and monetary policy?

Central banks in most developed markets, and even in some emerging markets will likely remain accommodative. The US Federal Reserve has shown a conviction to support spending for the foreseeable future via low rates. Likewise, the ECB and Bank of England have taken similar easy money stances. The only check on this dovish policy could be inflation, which has begun to flash warning signals in places like the UK.

What do you see as the biggest challenges or risks in the global economy?

Aside from inflation, a general lack of growth is an ongoing concern given still high public debt levels. Coming out of recession, developed countries have historically seen GDP growth at between 4% and 6%. Whereas after nearly three years in the current recovery, the western world has yet to achieve this kind of growth spurt. And, indeed many European countries are currently contracting. Household and corporate de-leveraging has been a strong impediment to a robust recovery. While most of the heavy lifting needed to address private borrowings is nearly completed, much of that debt burden has been passed on to public or state borrowings.

How does Butterfield Group manage through these risks?

Through our Group investment process we consider all factors including geopolitical outlook, economic growth and inflation expectations and identify long term strategic themes. Our Core Strategy and Research team and Asset Management councils continually consider the inherent risks and opportunities of all asset classes, sectors and individual holdings when creating and repositioning portfolios. Current preferred themes include Blue Chips and high dividend paying equities. Our Investment Committee, comprised of the most senior team members from across our jurisdictions, is responsible for providing oversight and governance, challenging the teams on all aspects of the investment process, strategy and performance, to ensure robust outcomes.

William Mack, CFA
Portfolio Manager,
Asset Management
Butterfield Bank (Cayman) Limited

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