With gloomy economic data appearing almost daily, 2011 will go down in history as one of the most volatile years for the global markets. In the month of August alone, around $6 trillion was wiped off global equity valuations as the markets spiralled downwards. But what does 2012 hold in store? More doom and gloom or a positive uptick in the global economic environment?
Schroders is the most bearish of the lot, predicting deep stresses in the eurozone area continuing into next year. Azad Zangana, European economist at Schroders, is assuming the eurozone crisis will continue to escalate in 2012, negatively impacting the UK economy. He is forecasting a dip of 0.4 per cent in GDP, as well as a spike in unemployment to 9.1 per cent at the end of 2012. He is adamant that the UK will fall into recession next year, although it ‘won’t be as deep as the 2008/9 crisis’. As for interest rates, the economist predicts they will be on hold until at least 2014 while the market recovers. Zangana is positive on inflation, though, as ‘the natural fall in inflation next year will support households, leading to stronger consumer spending.’ As for where to invest next year, Zangana and chief economist at the investment manager, Keith Wade, believe the US high-yield market offers some good opportunities. Likewise, David Harris, senior portfolio manager of the Schroder US Fixed Income fund, believes US corporate bonds could perform well in 2012 – but he is steering away from government bonds completely.
Bill O’Neill at Merrill Lynch Asset Management argues instead that investors need to focus on investments that offer yield, quality and diversification – but that the global economy will only experience ‘fragile growth’ in 2012. ‘Global economic growth at 3.7 per cent will be led by emerging markets,’ he says. O’Neill is bearish on commodities going forward, with gas and oil - ‘two of 2011’s strongest performing assets’ - unlikely to replicates their success next year. Gold, in particular, is likely to be held back by the US dollar’s strength, he adds. Whereas some fund managers see value in cheap European stocks, O’Neill recommends being underweight in the area, as although they are cheap and sentiment is at rock bottom, the eurozone crisis still poses too much of a risk. As for better-performing sectors, O’Neill forecasts strength in the UK commercial property market, with a focus on the prime sector; as well as large-cap UK and US stocks in the consumer discretionary, consumer staples and information technology sectors. He also expects investment-grade and high-yield corporate bonds to perform well, especially in the US.
Private bank Coutts is predicting that the search for income will be ‘one of the most important goals for investors’ next year as the global economic environment remains bleak. ‘The future of the euro remains centre-stage and this will continue to dominate the economic agenda in 2012, synchronised unfortunately with the multi-year theme of reducing debt levels across both the US and the UK,’ the bank’s economists say. Coutts is forecasting gold – as well as emerging market debt and corporate bonds – to be ‘better placed’ than global government bonds. Although it concedes gold is ‘not immune’ to market volatility, drivers such as negative real yields from interest rates give a positive outlook for the asset class. ‘Gold is looking more attractive than other commodities as it is less likely to be affected by the lack of global growth,’ the bank adds. Overall, the bank expects equities to perform better than fixed income.
There’s trouble ahead in the bond markets, according to Fidelity’s Trevor Greetham. The eurozone crisis will continue to pose an extraordinary problem to the stability of the UK economy – and 2012 will be ‘make or break’ for the euro currency. While he expects all 17 member states to remain in the eurozone, if Germany leaves (which he admits is a distinct possibility), the banking sector and European export market will be left ‘for dead’. As for the close of the FTSE 100 next year, Greetham predicts a binary result: 4500 if the eurozone crisis persists, or 6500 if a credible solution to the debt crisis is found. ‘All in all, things look bleak in the near term,’ he adds. However, Greetham believes things will pick up during the latter part of 2012. ‘A bullish case can be made for 2012,’ he says. ‘It rests on a US-led economic upswing strong enough to offset anticipated weakness in the European economy, and it assumes the worst-case scenario of a messy euro break-up can be avoided.’ US equities could perform well due to their defensive qualities, says Greetham, and he is also favouring gold as a defensive asset. Diversification remains the most important part of investment for 2012, as ‘investment conditions remain difficult’ across the board.
Jeremy Tigue, manager of the Foreign & Colonial investment trust, believes politics will continue to be a huge issue in 2012 with limited decisive action taking place while some major world leaders attempt to keep voters on side in the run-up to elections. Next year there will be elections in China in January, Russia in March, France in April and the US in November. In Tigue’s view, the result of such political procrastination will be that the crisis in the eurozone will rumble on. He comments: ‘The eurozone desperately needs to take action against a rising tide of contagion and 2012 will be make or break for them. The three most likely outcomes are quantitative easing, full fiscal union or a break-up of the eurozone in its current guise.’ Tigue predicts global growth of around 2-3 per cent in 2012 (rather than the 3-4 per cent widely predicted). But he is more upbeat on dividends – ‘the dividend outlook is robust’ – and specific regions of the world. ‘The best growth potential is in the emerging markets. Big multinationals like Unilever that are expanding there could do well.’ Tigue adds that the US, with its confident consumers and world-leading companies, could also perform well in 2012.