According to the firm’s 2012 Annual Global Outlook, four big themes will have the greatest impact on markets and asset returns over the next 12 months.
• Global deleveraging will continue to be the backdrop for economics, finance and politics for 2012. Balance sheet recessions are typically followed by elongated, grinding and below-trend recoveries, so expect lower standards of living, high unemployment, lower returns and higher volatility.
• The Euro will be the key risk to improved market sentiment. Given the fragility of the European banking system, potential European policy errors and inaction are likely to be the single largest source of systemic risk and threat to global market sentiment.
• Ever since 2009, Russell Investments has argued the US economy will recover in the shape of square root sign (down, then up and flat, flat, flat). Expect no change to that thinking in 2012, it says. This year, we’ll see news on the US economy gradually improving, ongoing strength of US corporate earnings and expanding pockets of private investment strength.
• The Chinese/Asian growth engine will provide “modestly positive” effect. Chinese authorities have just embarked on an easing cycle and Russell Investments’ strategists believe the country will likely achieve reasonably soft landing. Combined with other emerging-market easing, China and the US will once again contribute as engines of growth for global gross domestic product (GDP), they say.