Despite the supercommittee announcement slated for later today, Europe in crisis, and high unemployment, speakers at the recent ING investment outlook session were optimistic. Investors are overly focused on global risk rather than fundamentals, skewing perception towards a looming Armageddon rather than the dawning of hope in mid-cap stocks, high yields, emerging-market debt and global REITs, participants said.  

"Don't get confused by the global risk emanating out of Europe. Fundamentals are marching forward and Europe's problem will be solved. I am expecting an end-of-year rally," said Douglas Cote, chief investment strategist for ING Investment Management (ING IM), at the event last Wednesday.

ING IM is forecasting improved GDP of 2.5 percent next year, with modest inflation, providing a backdrop for U.S. equities to rise with a target for the S&P of 1,450-1,475 at year-end.

"We're not predicting a European breakup; however the possibility will drive volatility in global markets. Housing will remain weak but not get any worse. The main risk to the U.S. is Europe breaking up," said Paul Zemsky, chief investment officer of multi asset strategies for ING IM.  "The unemployment rate will be very stubborn, but may drop by half a percent."

Both the 13.9 million unemployed persons and the 9 percent unemployment rate changed little last month. The unemployment rate has remained in a narrow range of 9 percent to 9.2 percent since April, according to the Bureau of Labor Statistics.

"Companies are a bit cautious because of volatility, Europe's potential insolvency and the S&P downgrade this summer.  Uncertainty causes companies to be more conservative and to tend towards not hiring that extra person," says Zemsky.  "Although productivity has increased, we haven't seen growth in areas that use a lot of workers, such as construction. The areas that have shown growth are less people intensive."

Construction employment declined by 20,000 in October, offsetting an increase of 27,000 jobs in September, according to the Bureau of Labor Statistics.

Investors will likely continue to face volatile markets in the first half of 2012 as Europe continues to sort through its fiscal challenges.

"The key issue is whether Italy will deleverage and restructure. As long as liquidity is provided to Italy, they can get on a deleveraging path," says ING IM Fixed Income Chief Investment Officer Christine Hurtsellers. "There are contingency plans and conversations with the ECB as to what to do. If Europe falls apart, with everything we are seeing, then it's a dark time."

Steady economic growth in the U.S. could spark an 8 percent to 9 percent rally in domestic equities, according to ING IM.

"About 300 of 450 companies in the S&P 500 reported earnings surprises for the third quarter. That's two-thirds that have had positive earnings partly because companies aren't hiring. So they are getting top line revenue growth, keeping expenses low and profit margins are increasing, which is great for companies but not so great for workers. Overall, this has led to higher profits," said Zemsky.  
Global REITs are expected to continue performing strongly as the sector experiences steady cash flows from the commercial property sector, but investors would be wise to also look into mid-cap stocks, which Cote labeled the equity market's sweet spot.

"For the past decade, they have trumped large-cap stocks. Mid-cap companies have the financial wherewithal of large-cap stocks, but with the growth prospect of small caps," says Cote. "I would invest a 60/40 portfolio with a good contingent of mid-caps because that's how you will get a return."

"Europe's runaway debt problem will happen in the U.S. unless there's progress on the budget. If the supercommittee doesn't come up with a rational program and Congress doesn't enforce the budget laws, we're headed for an untenable situation based on the size of our debt," said Zemsky.

ING IM maintains a positive outlook for most fixed-income risk sectors, with high-yield and emerging-market debt (EMD) being a favored area for 2012.  

"We're overweighted in high-yield because the yields are at 9% but we are underweighted in investment-grade bonds," says Zemsky.

The fundamentals of high-yield corporates look appealing, Hurtsellers notes, with low default, improving credit quality and lowered inflation.

"With coupons at or near 8 percent and the possibility of capital appreciation, high yield appears to be a particularly good opportunity," said Hurtsellers.

-Juliette Fairley