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Top 10 global economic themes and tips for 2012

Top 10 global economic themes and tips for 2012

If it wasn’t clear to you yet, nobody on earth will has illusions of grandeur for the global economy situation. But here’s Merrill Lynch’s handy guide to navigating through 2012.

December 20, 2011 10:42 by

Investors should expect another turbulent year of market volatility during 2012 from a mix of heightened policy risk, political uncertainty, low growth and low interest rates, all of which will translate into modest investment returns, according to BofA Merrill Lynch Global Research’s 2012 Year Ahead Outlook.

Against a backdrop of a looming recession in Europe, a still-struggling US economy, high oil prices and slower growth in China, BofA Merrill Lynch Global Research’s macro analysts forecast global economic growth of approximately 3.5 percent during 2012. The team anticipates that credit and commodities will outperform equities in the first half of 2012 and recommends that investors overweight corporate and emerging market bonds.

“The global economy can weather a normal size recession in Europe, in our opinion,” said Ethan Harris, co-head of Global Economics Research. “The US faces its own challenges, with gradual fiscal tightening and considerable uncertainty around policy after the election. As a result, while we expect solid 3 percent GDP growth in the current quarter, we look for growth to slow to just 1 percent by the end of 2012.”

Michael Hartnett, chief Global Equity Strategist and chairman of the BofA Merrill Lynch Research Investment Committee (RIC), added, “The very real risk of policy mistakes causing a recession in the US or a hard landing in China means that investors should conservatively allocate assets in 2012. Despite our short-term caution, however, we anticipate that global equities could rally by 10 percent next year from current levels, aided by liquidity, modest earnings growth and cheap valuations. In a bullish scenario, 2012 could represent the beginning of the end of the great bear market in equities.”

“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,” added Alberto Ades, co-head of Global Economics Research and head of GEMs Fixed Income Strategy. “The global growth malaise will mute export activity and temper demand for commodities, creating significant risks for emerging market investors in 2012.”

Ten macro themes for 2012
Heading into 2012, the RIC recommends investors position portfolios for the following ten macro themes:
• Slower economic growth. Co-heads of Global Economics Ethan Harris and Alberto Ades forecast that global GDP growth will slow modestly to 3.5 percent in 2012. The US economy will enter 2012 with momentum but weaken in the second half to just 1 percent annualized growth in the fourth quarter of 2012. They expect Europe will see a mild recession, while emerging market economies will see growth of 5-6 percent. Asia should remain the most resilient with growth of 7.1 percent and Latin America should see growth of 3.3 percent.

• The US consumer will weaken…again. The US Economics group expects the recent momentum from US consumer spending to subside in coming quarters, absent much stronger jobs creation or wage growth. Consumer de-leveraging will remain a drag on the US economy in 2012.

• A soft landing in China. China is vulnerable to a US and European recession, but a healthy balance sheet, slowing inflation and massive foreign reserves mean China can ease aggressively, if necessary. The Global Economics team expects China to avert a hard landing and forecasts GDP growth of 8-9 percent in 2012. As inflation risks fade in 2012, the group looks for Chinese policies to turn increasingly pro-growth.

• Quantitative easing in the US and Europe. Tighter fiscal policies in the US, Europe and Japan are likely to be offset by accommodative monetary policies around the world, aided by lower inflation. Importantly, the Global Economics team projects fresh rounds of quantitative easing by mid-2012 in both the US and Europe. The RIC expects that…(CONTINUED TO NEXT PAGE)

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