Below is the executive summary from Russell’s 2012 annual global outlook. Please read the full report from our team of global investment strategists.
Our central scenario, which assumes the worst outcome in Europe is avoided, is for a moderate recovery in the global economy and a volatile, yet ultimately slightly positive, equity market outcome. This is not just our view, but an emerging consensus around the world. Indeed, this mediocre-at-best and potentially very-bad-at-worst scenario has solid groundings in any serious global analysis. Yet it is often good practice, when facts and their interpretations all seem to line up on the same side of a market issue, to look at the contrarian possibilities. What could surprise us on the upside?
- Any serious considerations of the positives must necessarily start with the presumption of an effective, durable European resolution. A case can be made that Europe’s problems in the short-term – namely access to funds for solvent but illiquid entities, to buy time for effective structural solutions to be developed – isn’t that far away. This would set the stage for global investors to return to corporate and economic fundamentals.
- Next on the list is a steady – even if unspectacular – U.S. economic recovery in 2012. Our central forecast for the U.S. labor market (barring a European convulsion) is for job growth of nearly 200,000 per month by June 2012. Move that up a few months, and add a few thousand more jobs to the central forecast, and you have the ingredients for much improved sentiment regarding the world’s biggest economy.
- China, clearly in slowdown mode, could pull off a smooth landing and manage to avoid an abrupt deleveraging and credit crash.
- With the Chinese and U.S. engines running smoothly, the European scenario could quickly go from flame-out to full blast again, as the export machines in the core draw upon the fuel of U.S. and Chinese demand.
- One can see this supporting the fourth engine of global growth: the rest of the emerging market world. Commodity exports, the resumption of ready trade financing and improved investor sentiment would find its way into this segment of the market. A positive feedback loop would ensue.
- If stock market valuations are beaten down in early 2012, the scope for a rally will be huge. In 2009 global equities, realizing that Armageddon had been well and truly avoided, rallied nearly 25 percent through the end of the year (as measured by the MSCI AC (All Country) World Index). Active managers in all asset classes would have the chance to fill their boots with cheap, but attractive securities.
- This does not mean that we need to worry about bond yields soaring. Central banks will continue to take out insurance policies against deflation and make sure that the bursting to life of the four engines of global demand are not mere hiccups. Even if inflation pressures mounted, this would probably be greeted with a sigh of relief, evidence the global deflation has been avoided.
- Nevertheless, some normalization of yields would be expected, meaning equities-versus-government bonds would become a winning play, with credit and other assets leveraged to corporate fundamentals strengthening. This would generate returns from both spread-narrowing and attractive initial yields.
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