Jeremy Grantham’s GMO has published its fourth-quarter update, offering a contrarian position on Europe and outlining its strategies as we head into 2012.

The firm says it moved “incrementally into Europe” in the fourth quarter of 2011, adding. “Selectively, slowly, prudently, of course, but the general belief is that markets have overreacted, and this always presents some opportunities.” GMO says the move was “by no means a ‘call’ on the bottom of possible European corrections or crises, but valuations are such that bad scenarios are already baked into some prices.”

Some highlights of the firm’s strategy heading into 2012:

Wary of Bonds: “We are literally running out of superlatives to describe how much we hate bonds,” the report states. “Yields are pitiful, dangers of even a slight recovery that could wreak havoc for long-duration portfolios loom, and monetary policies globally certainly have added to the specter of rising yields.”

Maintaining a Quality Bias: High-quality stocks continue to trade at attractive valuations, the report says, and high-quality is also attractive because of the continued instability in the global economy.

Biased Toward Value in EAFE: GMO says it is beginning to find attractive spreads between value and growth stocks in international equities.

Slightly Reduced EM Exposure: The possibility that China’s “economic bubble” won’t be deflated without a contagion effect has GMO concerned.

Seeing Volatility as Opportunity: “We continue to be interested in the market’s short-term swings only insomuch as they offer us attractive opportunities to purchase stocks for less than they’re worth,” the update states. “On this front we continue to stand, as always, ready and waiting.”