International banks such as Bank of America, Merrill Lynch, Goldman Sachs and Barclays yesterday warned of a turbulent year ahead that will be characterised by high market volatility, sluggish economic growth and poor investment returns.
Investors should expect another year of volatility in 2012 due to a mix of heightened policy risk, political uncertainty, low growth and low interest rates, according to BofA Merrill Lynch Global Research’s 2012 Year Ahead Outlook. “The global economy can weather a normal size recession in Europe, in our opinion,” said Ethan Harris, co-head of Global Economics Research of BofA Merrill Lynch. “The US faces its own challenges, with gradual fiscal tightening and considerable uncertainty around policy after the election we look for growth to slow to just 1 per cent by the end of 2012.”
Despite the economic challenges the global economy faces from a looming recession in Europe, a struggling US economy and slower growth in China, Goldman Sachs is not all that negative about the global economic environment and investment climate.
“There are plenty of economic, political, social and policy risks for 2012. They are not all negative. It is quite conceivable that not only the US will continue to surprise on the upside, but others could too. This includes some of the Bric (Brazil, Russia, India and China) like Brazil and India,” wrote Jim O’Neill, Chairman of Goldman Sachs Asset Management in a letter addressed to investors.
However optimism on emerging markets comes with several caveats. “Emerging markets will de-couple from the US and Europe, but the combination of lower growth in developed economies and moderately high commodity prices place emerging economies in a difficult position,” said Alberto Ades, co-head of Global Economics Research and head of Fixed Income Strategy at BofA Merrill Lynch.
Barclays Wealth has warned of grim investment mood. Nonetheless, it believes that too much bad news is already included in asset prices and advises investors against trying to fine tune short-term market moves. “Taking a three-month and longer perspective, we recommend sticking with a diversified long-term investment portfolio. This should allow investors to benefit from the stability that will eventuate if we are right about the euro not breaking up, large governments avoiding default, and developed world companies operating profitably and solvently,” said Kevin Gardiner, Head of Investment Strategy EMEA, Barclays Wealth. While Merrill Lynch has forecast global GDP growth will slow modestly to 3.5 per cent in 2012, Goldman Sachs has a slightly lower global GDP forecast at 3.4 per cent.
The year 2012 will likely be another year of low rates and scarce yield, and investors will continue to seek assets that provide attractive yields. Equities offer modest upside. While deleveraging and slower earnings growth are expected to limit the upside, quantitative easing and low valuation are expected to limit the downside.
Analysts said two of 2011’s strongest performing assets, gold and oil, are unlikely to replicate these returns in 2012. While supported by very low real interest rates, gold is likely to be held back by the US dollar’s strength. Controlled supply should limit crude oil’s potential decline.