Elections in 12 countries, recession in Europe to guide investor sentiment.
To say that 2011 was challenging for investors, would be putting things mildly. 2012 is unlikely to be any better. JPMorgan Asset Management says looking ahead is like peering into a dark tunnel with only a torch. There is little clarity on how different asset classes or geographies will perform, in the face of macro-economic uncertainties, geo-political risks and low levels of investor confidence.
There are a few key macro-economic developments and themes to watch for in 2012, which will impact investors across the globe. For starters, the euro zone crisis is not over and will continue to impact investor sentiment negatively, till it’s resolved. If the recession in Europe is fiercer than what most expect, it would be accompanied by an international credit crunch, dragging both developed and developing economies into renewed global recession.
Over the year, nearly a dozen countries will go into elections, representing nearly 50 per cent of world GDP. While the US and France will see presidential elections, China will see a one-in-10-year leadership change. German federal elections are due in February 2013. The outcome of these elections would also impact economic policy decisions. While political leadership in the developed world will gradually move towards a solution, JPMorgan says, it is likely the strongest support for global liquidity, economic growth and financial markets would come from the major central banks next year. This would also bring some semblance of stability in the financial markets. In volatile times, emerging market assets remain highly volatile. However, as inflation comes down in economies like India and China, central banks in both countries would get more room to ease rates. This would result in inflows into both emerging market equities and bonds. India stands to gain even within the region, as yields on bonds are higher compared to peers.
So, what is expected to happen to commodities and gold? Citi’s report on Global Perspectives and Solutions says: “Commodities are being torn between lower demand impact from the US, Europe and China and supply disruptions due to political unrest. For 2012, we believe most commodity prices will be range-bound but subject to downside demand and upside supply tail risks.”
Gold, which emerged as the best asset class in 2011, is likely to lose some sheen as the world recovers from the current crisis. In 2011, most central banks were net buyers of gold, with net purchases adding upto 192 tonnes. There is evidence now that “some of the troubled European sovereigns are selling gold stock piles for austerity and liquidity measures.” Going by these trends, gold may correct to $1,250 in 2015, due to a broader economic recovery and macro-financial stabilisation, says Citi.