2012: a frugal and crucial year
On the eve of the New Year, the challenges look more daunting than ever. Given the global economic backdrop, we see generally slow or slowing growth in 2012, notably in the eurozone. Emerging markets will likely feel the effect of the slowdown in developed economies, but they should still grow faster than the rest of the world. Their central banks generally have the leeway to stimulate growth as inflation moderates, whereas the options for those in developed countries seem more limited. The recovery is likely to persist in the US and Japan.
Government finances should remain a hot topic in 2012. The situation in the eurozone has raised doubts about the functioning of European monetary union, sharpening the market’s focus on sovereign debt risks. A solution, even a partial one, will take time and test markets’ impatience.
Developed equity markets could face pressure as current optimistic earnings expectations are adjusted downwards to reflect the growth outlook. We expect spreads on emerging market debt to widen slightly in view of the global economic slowdown and the EU debt crises.
We see opportunities to create value by actively managing equity exposure, overweighting emerging equities and debt relative to developed equities and debt, and in convertible bonds and high-income equities. Overall, 2012 looks to be an economically frugal and politically crucial year, in which market timing will be of particular importance.
Our views are discussed in detail in our investment Outlook for 2012.