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John Osterweis is chief investment officer of the US-based investment firm Osterweis Capital Management.

With the eurozone faltering and growth in emerging markets slowing, US exports are not likely to be a growth engine this year. Perhaps more important to our outlook, government stimulus spending is scheduled to wind down in 2012, so fiscal policy is poised to become more restrictive.

Add to this the inevitable uncertainties of an election year and the political landscape cannot be encouraging.

Monetary policy will likely remain highly stimulative, but will not, in our opinion, have a significant incremental effect. Interest rates are already low (negative in real terms) and money creation quite robust.

But since the private sector is in a deleveraging phase, cheap money is not likely to cause businesses or consumers to borrow more money. In fact, a lot of new debt issuance by businesses has been for the purpose of refinancing higher-cost older debt, not to finance new investment.

Only the public sector has been adding net new debt, and obviously this cannot go on endlessly. At some point the piper will want to get paid. Either government will have to make the necessary structural changes before the markets riot, or a financial crisis may force radical solutions.

As we are seeing in Europe, the markets eventually grow tired of governments that keep piling on debt. With the US government adding over US$1 trillion of new debt per year, the question increasingly seems to be when, not if, the US will face such a market reaction.

Politicians at the federal level seem totally incapable of facing the need for serious structural reforms to our entitlement system, namely healthcare and social security, and to our tax system. Eventually they will have to tone down their partisan posturing and tackle the structural issues in a substantive manner.

Fortunately, we are beginning to see progress on such issues at the state and local levels. Perhaps this can establish a national mindset that will encourage Congress to stop dithering and "get with the program".

Investment outlook

Given the likelihood of slow growth and great political uncertainty, the investment climate is less than robust. Bond yields are already quite low, so fixed-income returns at best may approximate the coupon rate and at worst may turn negative if interest rates start to rise.

Equity returns could be modestly better than fixed-income returns, but it is hard to envision them greater than high single digits. This is because profit growth is likely to be modest and current valuations are not extremely cheap.

Within that framework, however, we believe two themes should prove rewarding in the equity markets. The first is a focus on rock-solid companies with the ability to grow dividends over time.

Stocks of highly-rated companies, yielding 2.5 per cent to 3.5 per cent and histories of raising their dividends every year, may look awfully attractive for an income-seeking investor when compared to the 10-year US treasury bond with a static 2.0 per cent yield.

Assuming interest rates stay low and economic growth subdued, the earnings, cashflow and dividend streams of blue-chip companies with below average cyclicality should continue to attract investor attention.

The other theme has been and continues to be a core element of our investment strategy, namely a focus on companies undergoing significant fundamental improvement via turn-around, merger or restructuring that can lead to accelerating earnings and cashflows.

To the extent such companies are currently out of favor and unloved and, therefore, selling at cheap valuations, their stocks can prove immensely rewarding as they experience both earnings acceleration and a contemporaneous increase in their valuation multiple.

We believe that 2011 was an aberration in terms of stockmarket correlations and that gradually stocks will once again perform based more on their individual results and outlooks and less on the market�s en masse "risk-on," "risk-off" vacillations.

Despite our near-term caution, which reflects a very uncertain economic and political climate, we are increasingly convinced that equities are poised for solid longer-term returns.

Over the past ten years, stocks generally underperformed bonds. This is highly unusual. Stocks are now reasonably priced and so long as the economy enjoys nominal growth, profits are expected to expand, setting the stage for decent equity returns that should enable stocks to outperform bonds once again, especially if interest rates begin to rise.