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The authors examine the current banking environment and opine on pricing and other trends that should lead to an unprecedented level of bank transactions during the next several years. They discuss the factors that should create the need and opportunity as well as present the challenges that have slowed substantial consolidation activity.

hat a difference a new year makes. Fueled by massive liquidity injection from the European Central Bank (ECB) and expectations of additional easing from central banks around the globe, stocks raced out of the starting gate and left bearish sentiment in the dust.

Emerging market stocks have historically provided differentiated performance compared to other important asset classes. Along with providing the impetus for growth in a long-term portfolio, including emerging market stocks as part of an asset mix may help improve the risk-reward ratio of a portfolio because of its inherent diversification benefits.

The recent Facebook IPO announcement has had a positive impact on sentiment. Perhaps that sentiment will catch on in Europe. However, it seems that gloom still weighs heavier there than here. Private equity firms will most likely continue to wait for the right time to exit companies, and if the equity markets are as volatile this year as they were last year, activity could be choppy.

The style box concept can help investors manage portfolio risk effectively. But thinking outside the box – considering opportunities across the spectrum, exploiting efficiencies from both beta and alpha perspectives, and using large-cap stocks selectively – may give investors a better chance to outperform the market.

While the outcome of many global issues remains uncertain, we believe the risk/reward equation favors taking well-calculated, above-average risk. Investor psychology can change at any moment. When the market returns its focus on individual company fundamentals, we expect significant alpha will be generated by portfolios that own high-quality companies with above-average beta.

The world continues to ride the same train of global imbalances. While short-term solutions have allowed us to arrive at the next station, few are attempting to address the long-term issues. We believe that capital markets will continue to assail the weakest links in the financial system, which, hopefully, instills the required discipline for policymakers to make needed, but difficult, decisions. Unfortunately for long-term investors, this suggests that we will continue to encounter a series of market crises, leading to continued market volatility that can test investor resolve.

Despite continued concern about sovereign debt, particularly in Greece, the bank’s 11-member investment committee is encouraged by improved business surveys in the U.S. and some emerging markets as well as tentative improvements in Europe. Here, committee members assess the outlook for fixed income, equities, commodities, real estate, and currencies.

Tail risk can be reduced by enhancing a portfolio's overall risk-return characteristics. Often this approach will blend several distinct strategies: broader diversification, volatility-based risk management, and drawdown control, perhaps combined with active management strategies such as managed futures or low-beta equities.

As we briefly review 2011, one thing is apparent: corporations generally had a better year than politicians, job seekers or investors. Despite 2011’s economic volatility, companies delivered better earnings than the consensus had forecast last January. Yet despite solid corporate profitability, macro uncertainties kept stocks under pressure for most of the year and ignited a simultaneous flight to the safety of U.S. Treasuries. With 2012 being an election year, we can expect to see even more sparring in Washington, D.C.