Schroders’ Virginie Maisonneuve identifies key drivers for success in 2012

Schroders’ head of Global and International Equities Virginie Maisonneuve shares her views on equities success in 2012.

2011 was the year when the European ‘party’ ended. The problems created by having a monetary union without a fiscal union, compounded by strong structural divergence in the region, have unravelled. What was hoped to be an isolated problem in Europe’s ‘periphery’ has spread to engulf the entire region in a crisis that threatens the Eurozone’s very existence – in its current form at least.

The burden of sovereign debt has not been confined to Europe. In July, political
gridlock about raising the US debt ceiling almost forced the world’s largest economy into a technical default and prompted S&P to strip the country of its coveted AAA rating. Although a deal was struck in time, the difficulty for politicians to lead in such an environment on both sides of the Atlantic triggered a damaging crisis of confidence in the fragile markets.

This crisis of confidence has developed despite the fact that, as we move into 2012, the corporate world is in relatively good shape. Balance sheets are generally healthy among the large companies and cash flows are strong. Unlike in 2008, 2011 has very much been a year of sovereign weakness, not corporate weakness. However, because of the leadership problems on the global stage and with markets pricing in a weak economic scenario, companies are reluctant to increase spending and start hiring. With companies postponing business decisions, the risk of a recession in Europe next year increases.

Adjusting to the ‘new normal’

One of the underlying causes of the crisis of confidence has been a reduction in global growth expectations. Tighter fiscal policies in the developed world are being employed to help deal with excessive debt and facilitate deleveraging. This is very much in line with the ‘new normal’ environment, in which developed world growth is muted and emerging market growth is robust. This theme (‘Supercycle’) continued to influence the global operating environment this year and, along with our other two key themes of climate change and demographics, will be just as instrumental next year.

Looking into 2012, we believe volatility will remain going into the first quarter of next year as the markets gauge the resilience of the European and global financial system, and how it will cope with potential additional shocks. There will be three main causes for the continuing volatility: first, the future of Europe; second, the US elections; and third, the nature and effect of the slowdown in Chinese growth.

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