After a tumultuous 2011, the natural question to ask is what augurs for 2012! With that objective in mind, I summarise below two interesting viewpoints – from Bill Gross who runs the world's largest bond manager Pimco and from Robert Prince who is the co-CIO of the world's largest (and incredibly successful) hedge fund Bridgewater (which was up 25% until end-November versus -3.7% for the average macro hedge fund). Both present thought provoking outlooks which are worth giving serious consideration to:

Bill Gross:

-We are entering 2012 in a "paranormal" environment created by "zero-bound" interest rates which have created two possible "fat tailed" outcomes – either a central bank driven inflationary expansion or an "implosion" driven by delevering.

-A zero-bound interest rate environment , where rates are held at or close to zero for a significant time, creates no incentives to expand credit as flat yield curves provide limited opportunities for earning "carry" or capital gains.

- In addition, money market fund business models break-down as operating expenses exceed income leading to shifting of deposits to banks who then deposit them with the Fed in the form of reserves.

-The Fed, in its late January meeting, is likely to announce that it will keep rates at 25 basis points for 3 years or more until inflation or unemployment reach specific targets. This is QE by another name, and if it doesn't work , then a more formal QE3 is likely by mid-year. This mirrors the ECB 3 year refinancing operation, to be used by banks to fund sovereign bonds, which is a thinly disguised form of QE as well.

-In this environment it would make sense for investors to hedge their bets until the outcome becomes more clear:

-Maximise duration/average maturities as negative yields will continue with central banks holding rates at zero for a while.

-Hold US sovereign bonds in the 5-9 sector, which protect against inflation and benefit from the "roll-down" effect. Avoid European government bonds.

-Keep long term TIPS bonds to protect against inflation.

-AA and A rated credits and senior (rather than subordinated) bank paper.

-High yield stocks in sectors with relatively stable cash-flows - electric utilities, big pharma and multinationals.

-Commodities are tilted to the upside given the scarcity and geopolitical risks. Gold likely to go higher if QEs continue.

-The dollar could go either way – go up in a delevering scenario or debase in a reflationary scenario.

-Lower expectations to 2-5% long-term returns for stocks, bonds and commodities.

Robert Prince:

-The US and European economies are like "zombies" and are likely to remain like that (slow growth and high unemployment) until they reduce their debt burdens. Interest rates in the US and Europe will be locked at zero for a long time.

-Stocks will be vulnerable to "air pockets" from shocks – particularly from Europe. However, investors looking at the decade ahead could find equities to be attractive.

-Treasuries still have upside, despite low rates, and gold and Asian currencies are likely to do well as central banks continue to print money.

-The US economy is unlikely to sustain its recent better-than-expected performance as its driven by a decline in the savings rate, without material gains in personal income and employment. In addition, long-term credit growth remains weak.

-The leveraging-up period went on for 60 years- from the early 1950s to 2008 and was self-reinforcing on the way up – and with the bursting of the debt bubble the process is now self-reinforcing on the way down.

-The delevering process has hardly started with household debt to net worth being still higher than it was before 2008. Against this backdrop, the Fed will continue to buy government bonds (albeit on a sporadic basis).

Thought provoking views, highlighting the importance of keeping the macro delevering picture in mind when making investment decisions. I think this further reinforces the importance of diversity and constructing a portfolio which has something "for all seasons". A portfolio we have discussed for a while - comprising US and global energy, US and global high quality multinationals, high grade corporate and US mortgage and treasury bonds, EM (China, India and select others) stocks, select EM (saving surplus countries) currencies and bonds, gold and cash should be able to withstand the shocks while providing reasonable (5-7%) returns over a 3-5 year period. The case for having substantial exposure to emerging markets becomes even stronger with the above views (despite the underperformance in 2011) given their significantly superior debt, demographic and growth profiles when compared to the developed world. US treasury and mortgage bonds and cash will provide insurance against the frequent "air pockets" ahead of us, with corporate bonds and stock yields providing the income flows.

Regarding the global economic outlook for the year, it is clear (as Gavyn Davies points out in the FT) that the leading indicators (see graph below) point towards an improving global economy since the low point reached in the summer of 2011. It is also remarkable to note that stock markets followed the path of the leading economic indicators (which lead the economy itself) quite closely! We can therefore expect a reasonable start to 2012 with a possible slowing down again by the summer (for the reasons outlined in the two views above). The key risk remains contagion via stresses in the eurozone banking system (as pointed out by Gavyn Davies) as illustrated by Bloomberg's financial conditions indicator (see second graph below) which shows a marked deterioration in Europe (to about half the 2008 levels) – which could have been worse if it were not for the ECB's unprecedented quantitative easing via their 3 year refinancing programme. In contrast, please note the Fed's success in keeping financial conditions easy in the US.