Russell Investments has released its 2012 Global Outlook, predicting that global deleveraging will continue into the coming year. “It took three decades for the developed economies to borrow more money and it will take years to pay it back,” says the report.
“We anticipate continued volatility, especially as Western democracies reconcile the need for austerity with the need to support economic growth and provide for rising outlays on entitlements,” says Pete Gunning, global chief investment officer with Russell Investments. “However, we do expect to see more clarity around the impacts of the proposed solutions to this year’s headline-dominating policy issues globally.”
The outlook points to four themes that the firm believes will have the greatest impact on markets and asset returns in 2012:
- Global deleveraging will continue to be the backdrop for economics, finance and politics. Balance sheet recessions are typically followed by elongated, grinding and below-trend recoveries. Lower standards of living, high unemployment, lower returns and higher volatility should all be expected.
- The key risk to improved market sentiment is the euro. Given the fragile state of Europe’s banking system, potential policy errors and inaction could be the largest source of systemic risk and threat to global market sentiment.
- Continuation of a “square-root-sign-shaped” U.S. economic recovery. The square-root-sign-shaped recovery (classified as a sharp rise, followed by stagnant growth) is expected to continue into 2012 with gradually improving news on the U.S. economy, ongoing strength of U.S. corporate earnings and expanding pockets of private investment strength.
- The expected modestly positive effect of the Chinese/Asian engine of growth. Chinese authorities have just embarked on an easing cycle, says the report. Combined with other emerging-market easing, China and these emerging markets will, along with the U.S., push growth for global gross domestic product.
However, the report concedes that the ongoing crisis in Europe will likely sap the strength of emerging market asset classes—at least temporarily—as these economies are weighed down by the tightening of credit globally, the knock-on effects to growth and liquidity, and sustained risk aversion. “While we are more confident on the U.S. and China forecast with each data release, we are acutely aware that forecasting political outcomes is very difficult,” says Shailesh Kshatriya, senior investment analyst, Canadian strategy group, Russell Investments Canada. “We believe that Europe will remain a source of systemic risk.”
Market volatility levels are likely to remain elevated and corporate earnings are likely to slow, according to the report. However, moderate profit growth will likely balance the scales to result in positive, albeit modest, global share market returns.
“Making gains this year will require an active, global, multi-strategy approach and identifying outperforming managers in every sector and region will count more than ever,” said Gunning. “Gaining access to non-traditional securities through alternatives will also be a key potential return enhancement strategy. In a world of increased volatility and lower returns, a dynamic approach to investing to take advantage of opportunities as they present themselves will increasingly become the norm for successful investors.”