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The first rule of investing: Prepare to be surprised

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The U.S. economy will soar next year, Europe will sink into a deep recession and Research In Motion Ltd. will double in price.

Well, maybe. These scenarios come from analysts and economists whose predictions lie outside the mainstream.

Why listen to these minority viewpoints? As 2011 has shown, unlikely events, ranging from a Japanese earthquake to a European debt crisis, do occur. For anyone seeking to profit in the markets, against-the-grain views are worth considering because they can point out potential surprises that conventional wisdom ignores.

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The term du jour describing the mainstream outlook for the global economy in 2012 is "muddle through." Economists, on average, predict U.S. gross domestic product will increase about 2 per cent, Europe's economy will contract moderately and Chinese expansion will slow to between 8 per cent and 8.5 per cent.

In opposition to the dominant view, Brian Wesbury, chief economist for First Trust Portfolios LP near Chicago, expects the U.S. to enjoy robust growth. He is an outlier in surveys of economists' forecasts and predicts U.S. GDP will surge between 3 per cent and 3.5 per cent in 2012. Mr. Wesbury, who was ranked by The Wall Street Journal as the top U.S. economic forecaster of 2001, is counting on new technology – such as cloud computing and new models of smart phones – to create jobs and accelerate business.

"I believe this is an explosion of technology, that it's the equivalent of the Wintel – the combination of Windows software and Intel chips – of the early 1990s," Mr. Wesbury said in an interview. "There's very positive underlying developments with technology, and in the end, that's what drives growth in any economy."

One Canadian tech company that could provide a happy surprise next year is RIM. The maker of the BlackBerry handset spent most of 2011 disappointing investors with missed forecasts, a network outage, hardware and software delays and product flops. The stock has plunged 75 per cent this year to $14.66, cutting the price-earnings ratio to 3.3 and making it one of Canada's least-valued companies.

The shares could be worth $25 in 12 months to 18 months, according to CIBC World Markets Inc. RIM has plenty of cash, its servers remain the backbone for secure e-mail at the world's largest corporations and its winning customers in several markets outside the U.S. and Canada.

"There is still a tremendous amount of upside on a P/E basis if investors gain confidence in RIM's ability to remain [competitive]" Todd Coupland, an analyst at CIBC, said in a research report this month.

Not all minority viewpoints are so rosy. Myles Zyblock, chief strategist at RBC Dominion Securities Inc., believes Europe's economy will crash next year as countries struggle to pay debts, governments slash budgets, banks refuse to lend, and officials open the way for the euro zone to disintegrate.

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"That would be a big surprise, if they only had a shallow recession," Mr. Zyblock said in an interview. "That's how pessimistic I am on Europe. The fact is, all the leading data is collapsing."

The macro-economic bible of gloom for next year could be a report this month by Pierre Lapointe, a strategist at Montreal-based Brockhouse Cooper, and his analyst colleague, Alex Bellefleur. Amid charts and commentary analyzing global stocks, bonds, economies, central banks, currencies and trade flows, they aim their what-ifs at a single target: What could go wrong in 2012?

"We think that a deeper-than-expected financial and economic contagion from Europe has not yet been factored in for the U.S. and emerging markets," said Mr. Lapointe and Mr. Bellefleur. "Moreover, there is a general expectation that policymakers will be able to pull us out of the slump, whether it is through quantitative easing in the U.S. and Europe, or fiscal stimulus in emerging countries. Again, we think that markets could ultimately be disappointed on those fronts."

Markets could also be in for a shock if U.S. President Barack Obama doesn't win re-election. Some commentators think a Republican victory would be good news for stocks, based on the party's pledge to cut taxes, which could boost personal spending and corporate profits.

"What's going to be the critical part for next year is the outcome of the November elections," said David Rosenberg, a top-rated economist, chief strategist at Toronto-based Gluskin Sheff + Associates Inc., and a columnist for The Globe and Mail. "If we get a Republican sweep, the bulls by the end of next year will carry the day."

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About the Author
Investment Reporter

Nicolas Johnson has covered global finance, markets and investing since 1998. He joined The Globe and Mail in 2011. He has worked as a reporter and editor with Bloomberg News in Paris and Tokyo, and also worked briefly in emerging-market debt at Société Générale. More

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