Politics are seen as one of the biggest unknown factors and risks for global markets and economies for 2012. Political uncertainty is high and with global economies still fragile, political influence and decision is likely to continue to weigh heavily on most economies – developed and emerging alike.
Threadneedle CIO Mark Burgess predicts real global GDP growth in 2012 will be close to 2.5%. “Barring the dislocation caused by the credit crunch in 2009, this would be the poorest showing for almost a decade.” Morgan Stanley is slightly more optimistic, looking at growth of 3.5% for 2012.
Trevor Greetham, portfolio manager, Fidelity Multi Asset Funds and director
of asset allocation at Fidelity Worldwide Investment, says there is the potential for 2012 to be upbeat. “All in all, things look bleak in the near term but 2012 does have the potential to be a ‘V’ shaped year for risk assets if Europe can deal with its political crisis and the US economy responds to stimulus. US data has been resilient, but as things stand I am doubtful financial contagion from Europe can be avoided.”
Schroders’ head of global and international equities, Virginie Maisonneuve, also believes the year could be one of mixed fortunes, with the potential to go either way. She says: “In Chinese “Wei Ji” means both challenge and opportunity. 2012 will most likely be a ‘Wei ji’ year for global equity markets.”
Like JP Morgan Asset Management, one thing most groups agree on is that
the eurozone debt crisis will continue to reverberate this year, which will
weigh heavily on not just the European equity market but also that of the UK.
Economic Outlook:
Zero growth for the UK in 2012 is what Burgess anticipates. Schroder’s UK
growth manager Richard Buxton says he doesn’t expect a severe contraction, rather more of the same – effectively flat.
Threadneedle is factoring in zero growth in the Eurozone, Fidelity and Schroders believe it’ll be in out right recession while JP Morgan predicts it will struggle
to reach 0.5% growth this year.
JP Morgan says even if a definitive solution to the Eurozone crisis is established,
the economic damage has been done and all the countries in Europe will
suffer lower growth because of it.
Burgess expects growth in the US will hover around 1.5% while Morgan Stanley is only slightly more positive, forecasting growth of around 2%.
Greetham says the ability of the US to underpin global activity is constrained by political deadlock over fiscal policy. Still, of the equity markets, Fidelity favours the US. “The market has relatively defensive attributes and, despite the fiscal deadlock, it is still the most likely to stimulate its economy to protect economic growth and jobs. Economic policy is more pro-growth than in other developed markets, with the Fed willing to take aggressive action when required and the Democratic administration likely to table fiscal stimulus and housing support programs.”
Morgan Stanley analysts are forecasting growth from the emerging market regions of around 5.7% this year. Others are also positive on emerging nations, albeit less so than in previous forecasts and with plenty of caveats – the biggest among them being the events in Europe.
According to JP Morgan in Asia growth will inevitably slow as trade with Europe drops, but GDP expansion will still outstrip any other region of the world. “Latin America’s commodity exports to China will continue and rising internal demand will benefit both Brazil and Mexico.”
Fidelity’s Greetham adds: “A recession in Europe will have an impact on emerging markets through trade and financial channels. European banks are the dominant lenders into Asia where credit growth has been a key driver of economic activity. Emerging markets will probably not be spared from volatility but a weak global economy in 2012 could provide a good long-term buying opportunity in much the same way as it did in 2008/9. When global growth starts to recover, emerging markets are likely to outperform developed markets by some margin.”
Equities
Globally, income-producing stocks are the favourites this year as managers expect dividend yields to provide some cushion to economic events. Morgan Stanley goes one further and predicts large caps will do best and is favouring defensive companies over cyclical ones.
High-yielding companies with strong balance sheets, robust cash flow generation and proven allocation strategies are likely to be in demand, Threadneedle’s Burgess notes. He favours those selling into emerging economies, businesses with access to a secular theme, such as healthcare, and those with superior products or intellectual property, like some tech stocks. “We expect the strong to continue to get stronger in 2012. Poor management, flawed business models and weak franchises are likely to struggle in the tough economic conditions we foresee, while proven management teams with robust models should prosper.”
As to individual regions, Fidelity likes US equities as well as those of the Swiss market, principally for its defensive qualities, with the currency hedged. Within Europe there remain some options, according to managers. DWS fund manager Tim Albrecht favours European export companies profiting from emerging markets growth, particularly German and Scandinavian companies. He adds: “German quality stocks will be the first choice in 2012. Public budgets are sound, companies are highly competitive internationally and demand for German products abroad remains high.”
Morgan Stanley forecasts -5% EPS growth in the UK this year, setting a year-end
FTSE 100 target of 5,000. Still, within this outlook there are opportunities, with the group expecting stocks that benefit from an increase in infrastructure investment
to do well. Schroders’ Buxton is more upbeat about prospects for UK equities.
“After over a decade of no capital return from investment in the UK equity market, investors are understandably disillusioned. But 10 years ago the market stood on
a price/earnings ratio of 24x. Today, it trades at a valuation much lower.
Crucially, starting valuations are the key to future returns - not the economic backdrop.”
Although select emerging markets experienced severe sell offs in the final months of 2011, Fidelity’s global CIO Dominic Rossie believes the attractions of these regions for equity investors will become even more conspicuous this year. As such he recommends investors should be alert to buying opportunities that allow them
to increase exposure at attractive prices.
JP Morgan anticipates Japan will continue to recover from last year’s tragic earthquake and tsunami and Schroder’s is upbeat as to what that means for equities. Shogo Maeda, head of Japanese equities at Schroders, says the market is trading at multi-decade lows and valuations look more than attractive while short-term economic dynamics are improving and public investments are flourishing. “In addition, supply chains are improving and enhancements from production and public expenditure will provide a stimulus for 2012.” That said, Maeda caveats his expectations for the region by noting there remain concerns over the yen, politics and nuclear power, which could dampen progress.
Fixed interest
Few investment groups express much optimism for sovereign debt in 2012, although within this area the highest quality governments, such as Australia, are favoured. Fidelity’s Andrew Wells comments that the year ahead will be a challenging one for bond investors as they are forced to adapt to a changing fixed income environment by recasting their established ideas about the nature of risk. “Sovereign defaults will remain the major concern for markets in 2012. However, investors should be wary of tarring all bonds with the same sovereign brush.”
Stefan Kreuzkamp sees opportunities in covered bonds, debt denominated in foreign currencies from AAA-rated countries such as Australia and New Zealand, as well
as bonds from selected emerging market countries like Poland and Mexico.
Threadneedle and JP Morgan both favour sub investment grade and like managers at Pictet, prefer emerging market debt (EMD).
JP Morgan notes EMD (both USD and local currency) features generous coupons, falling risk aversion and appreciating currencies, which combine to offer potential for positive total returns. “Corporate high yield debt also looks attractive as companies generally have sufficient cash to make interest payments and current spreads suggest a much higher default rate than we think is likely.”
Other asset classes
Threadneedle is relatively bullish on commodities, in the belief tight capacity should support prices in the dominant oil market, despite lackluster growth. However, Fidelity is less positive, remaining underweight in commodities, albeit overweight in gold. Contradicting that stance is JP Morgan, which believes gold, traditionally seen as a hedge against inflation, is at risk because an escalation of the eurozone crisis would likely be deflationary. According to JP Morgan, a rising dollar due to a flight to quality would also hurt gold prices.
Burgess says for investors seeking yield, the UK commercial property market offers a healthy pick-up over government bonds but could be susceptible to further bad news from the UK consumer. “The excess yield offered by UK commercial property over gilts is at historically wide levels and, although some areas of the property market are likely to suffer headwinds in 2012, the yield should be well underpinned.”
SLI is also positive on property for 2012, particularly the UK commercial market
as well as North America. “We see the best prospects in under-developed industrial locations in Canada and the cyclical US office markets where future supply is at 30-year lows.”
As to foreign exchange, Fidelity is expecting a period of euro and Swiss franc weakness and dollar appreciation while SLI feels the euro and yen look expensive and face plenty of headwinds. Instead the group favours the US dollar and is neutral on sterling in light on on-going QE initiatives.
