2012 a “year of healing” for the global economy, says SIG

Skandia Investment Group (SIG) believes that while the short-term outlook for bonds and equities is poor, the coming year should start to see some recovery in these asset classes.

The crisis in the Eurozone is likely to be resolved in the sense that it ceases to undermine the global economy and non-European markets. So, while deficit reduction is likely to remain a theme in almost all developed economies for the next few years, with the risk of a catastrophic meltdown greatly reduced, equities should weather the storm in the first half of 2012 and rise higher in the second half of the year.

Recession inevitable in Eurozone

While the US and UK are likely to avoid a formal recession (two consecutive quarters of negative growth), the UK could easily record one negative quarter and the Eurozone appears to have already entered recession. Some countries, namely Italy, Spain, Portugal and Greece, are likely to experience a deep recession, while France and Germany should contract only modestly.

However, 2012 is likely to be the year of resolution for the Eurozone debt crisis. A number of Eurozone countries will continue to struggle over the next few years and painful deficit reduction measures and structural reforms will dominate the political landscapes for many years to come. However, the Eurozone debt crisis will stop having the capacity to slow the global economy and being a reason why a global investor would not buy American, Chinese or German equities.

Four reasons why 2012 should be positive for global equity markets

Equities look set to deliver positive returns during 2012 as a result of four key factors:

1. Equities are cheap – valuations in many markets are very low following the strong growth in company earnings over the last few years.

2. Companies look set to be able to continue to grow profits.

3. The Eurozone debt crisis will be resolved following sufficient progress on closer fiscal union.

4. Investor sentiment will improve as a result of greater economic stability, boosting demand for risk assets such as equities and non-government bonds.

Emerging markets to outperform developed markets

Emerging market equities will outperform developed market equities as a result of falling inflation which should lead to lower interest rates in most emerging economies. Lower debts and deficits and stronger growth than in the developed world should also support emerging market equities relative to developed market equities.

Within emerging markets, emerging Asia and in particular China are likely to provide the best investment opportunities. Chinese equities have performed relatively poorly over the last two years but inflation looks set to fall sharply in the first half of the year to 4% and possibly lower by the end of 2012. This will allow the People’s Bank of China to lower reserve requirements again and cut interest rates if that is necessary.

 

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