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Strong performance equities unlikely in view of economic outlook
Robeco has published its annual Financial Markets Research and Outlook for 2012. The report contains in-depth analysis of the major global economic challenges ahead, as well as four special reports focussing on topics as diverse as Obama’s possible re-election and Chinese debt. It concludes that whilst a return to recession in 2012 is not inevitable, growth will undoubtedly be hampered by continued economic and political uncertainty. The highlights of the report are as follows:
Geographical variations – US will avoid recession
Although a general slowdown in the global economy in 2012 is highly likely, there are nonetheless significant differences between regional economies. The U.S. is expected to be the most resilient of the major developed economies in 2012, thanks partly to the low interest rate environment and declining price of commodities. Despite recent weakening growth, from a fundamental point of view, Emerging Markets remain attractive. Despite a recent acceleration in growth, a downturn is expected in Russia where Putin’s return as president poses difficult questions about Russian corporate governance. In Europe, Germany is considered likely to avoid two quarters of negative growth but France and Italy will not. The report names the eurozone as the weakest link in the global economy, with a mild recession in the region a very real possibility.
Several orderly Eurozone defaults a genuine possibilty
Europe is working on a solution to the debt crisis, but this does not directly solve the current problems in the southern European countries. One or several sovereign debt restructurings and/or leaving of the euro area by one or several countries cannot be ruled out. However any defaults are likely to be orderly, as a disorderly default will be prevented by the ECB at all costs.
Mixed picture on financial markets
As the debt crisis will continue in 2012, a strong performance for equities is unlikely. However, markets might get conviction that the ECB will act as lender of last resort in one way or the other. This will support markets. Within equities, emerging markets offer the best prospects for 2012 thanks to the solid fundamentals in emerging economies. Defensive stocks will enter a period of unattractive returns as soon as the prospects for riskier assets brighten, and Robeco takes a positive view on investment grade and high yield corporate bonds releative to their government counterparts for 2012.
Gold: bubble or double?
Acknowledging that gold’s performance has easily beaten other asset classes by a wide margin in recent years, the report asks whether this positive trend is sustainable. The research highlights the continued demand for gold for jewelry use in emerging markets, how low interest rates encourage demand for gold, and the creeping risk of currency depreciation as central banks flood the market with liquidity. It appears too early to expect a correction in gold prices in the near future.