The popularity of US stocks will be tested as investors turn their attention to the country’s need to tighten fiscal policy and start paying back its debts, according to Iveagh Private Investment House.

Chris Wyllie, Iveagh’s chief investment officer, believes that 2012 is the year when the three-year trend of US equity outperformance versus Europe will start to reverse.

“There will be a reconnection, and it can go both ways, either European equities will bounce back or the region will export growth malaise to the rest of the world,” he told WealthBriefing.

Unfortunately, Wyllie sees the second scenario as more likely. This means that he predicts that the biggest disappointment in 2012 will be China, a view that goes against that of many commentators who argue that, despite weakening growth, China is still likely to achieve a GDP growth rate of 8 per cent.   

“Chinese officials will continue to lie about their growth figures and do what they have to do to keep their jobs,” Wyllie said. “But you can see that manufacturing is contracting. I’m not trying to make the case for a big hard landing scenario, but I would argue that the biggest issue this year is not whether the US economy grows at 1, 2 or 3 per cent, or if Europe moves into recession, but if the Asian growth engine led by China is beginning to falter. Then you will see investors running for the hills.”

Wyllie talked about an inverse correlation between US equities and the US dollar, which is Wyllie’s favourite hedge against falling markets. Some analysts believe that quantitative easing is still an option if the economy wobbles, but Wyllie believes that the presidential election in the autumn will likely take QE off the agenda and that will strengthen the greenback further.

Many investor use gold as a hedge against the turmoil, but Wyllie thinks that the yellow metal’s ten-year long bull run, which was particularly marked last year, may be over. “A correction can come suddenly and sharply,” he said. “This could be the next big thing which could put turmoil into people’s portfolios.”

He believes that there is an inverse correlation between the dollar and gold. “What is good for the dollar is bad for gold,” he said.