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‏World on the brink: a fragile 2012 ahead

‏World on the brink: a fragile 2012 ahead

Merrill Lynch draws a fragile connection of events expected in 2012, as debt, weak spending and soft asset prices threaten us with yet another global recession.

December 10, 2011 9:24 by

Investors should focus on investments that offer yield, quality and diversification amid expectations that the global economy will avoid recession but experience fragile growth in 2012, according to Bill O’Neill, Chief Investment Officer for EMEA at Merrill Lynch Wealth Management and the author of the Merrill Lynch Wealth Management Year Ahead 2012.

Global economic growth, at 3.7 percent, will be led by emerging markets. US growth will improve slightly, rising to 1.9 percent, while China will benefit from a soft landing

The pressing need for mature economies to reduce debt, combined with weak business spending and soft asset prices, threatens to result in a global recession. However, a worldwide slump can be avoided, according to the Merrill Lynch Wealth Management Year Ahead 2012 analysis. China’s growth is expected to slow but experience a soft landing as the authorities move to reflate early in 2012.

“We see the Chinese economy expanding by 8.6 percent in 2012, compared to an expected 9.2 percent this year,” says O’Neill. The main risks to China’s economy are higher inflation or slower investment. India and Russia should maintain their strong growth of 2011 (full year 2011 growth is expected to be 7.5 percent and 4 percent, respectively).

The US Federal Reserve is likely to support the housing market to combat high unemployment and to keep rates flat until at least 2014, comments O’Neill. Consumers across the G5 (Canada, the Eurozone, Japan, the US and the UK) will benefit from an easing of inflation. The G5 economies should continue to grow in a meagre fashion, collectively by 1.1 percent, below the expected 1.4 percent in 2011.

Bill O’Neill, Chief Investment Officer for EMEA at Merrill Lynch Wealth Management and author of the Merrill Lynch Wealth Management Year Ahead 2012

A disorderly Eurozone sovereign default and/or withdrawal from the common currency head the major risks. Other potential negatives include continued policy paralysis in Europe, contagion to other regions from Eurozone deleveraging, possible currency wars, the risk of bank runs (a rapid withdrawal of deposits by investors) and over-zealous fiscal austerity.  Europe is a candidate for possible positive surprises too, says O’Neill.

First, the European Central Bank (ECB) could move more quickly than expected to monetise sovereign and bank debt, however, there is a chance that such a response comes only after further damage has been done to growth prospects in the Eurozone. Second, an unexpectedly deep rate cut by the ECB to 0.5 percent may also improve the region’s outlook. The combination of a weaker Eurozone economy and a more active central bank will likely lead to a weaker euro in 2012. A depreciated currency should provide a support for the region in the face of weak final domestic demand.

A weak consumer and ripples from the Eurozone will likely force the Bank of England into further quantitative easing – but this might not prevent the UK entering recession in the first half of the year. “While current economic challenges are very different from those experienced in previous cycles, 2011 exposed the responses of policymakers as inadequate. A lack of internal and external coordination has been one of this year’s major disappointments,” says Mr O’Neill. “Improving global coordinated responses to indebtedness could give a major boost to the Eurozone and world economy.”

Against the backdrop of fragile growth, investors are worried about the risks of even greater disappointment, according to Merrill Lynch Wealth Management’s Year Ahead 2012 analysis. “The task of ensuring diversification across investment portfolios is complicated by a shrinking set of ‘safe havens’,” says Mr O’Neill. “We are stressing yield, quality and growth in selecting equities.”

“In selecting equities in 2012, we are recommending a focus on large cap companies with strong cash flow and growing dividends,” Mr O’Neill says. “We urge caution but do not foresee catastrophe next year and continue to stress the need for a strategic framework to deal with ‘new normal’ conditions of  slow growth and higher risks. This includes anticipating periodic bouts of…(CONTINUED TO NEXT PAGE)

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1 Comment

  1. Roseanna on January 22, 2012 1:30 am

    Thanks for introducing a little rtaoinlaity into this debate.


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