The Year of Living Divergently
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What lies ahead in 2012 for financial markets? A time when emerging economies and asset prices finally come into their own? A descent into an investment nuclear winter? Or a re-run of 2011, with "risk-on/risk-off" market forces sidelining many investors?
More than three dozen leading BlackRock portfolio managers recently gathered at the BlackRock Investment Institute's Outlook 2012 Forum to exchange views. This site and the 2012: The Year of Living Divergently publication summarizes their ideas. The BlackRock Investment Institute leverages the firm's expertise across asset classes, client groups and regions. The Institute's goal is to produce information that makes BlackRock's portfolio managers better investors and helps deliver positive investment results for clients.
To live divergently in 2012, five points are worth remembering:
- Expect a decoupling of fast-growing emerging economies and the developed world. Emerging market assets would outperform in this "Divergence" scenario.
- The odds of a "Nemesis" crisis are much lower, but still uncomfortably high. The biggest potential trigger is an escalating European debt crisis.
- Investors will scrounge for income in a risky world with ultra-low interest rates. A global retirement boom and longer life expectancies underpin this trend.
- Market volatility is here to stay, magnified by elections and power handovers in key countries. Politics matter more than ever in investing.
- Inflation is unlikely to pick up. This market consensus view could be upended by a global monetary easing or a run-up in commodities prices.
Divergence and Nemesis
In a "Divergence" scenario, we would see fast-growing emerging economies and asset prices decouple from the debt-ridden developed world. Europe is expected to have a recession while the US economy and Japan muddle through.
The biggest risk is the "Nemesis" scenario where European debt crisis spins out of control and plunges Europe into a deep recession that spreads to the rest of the world.
Probabilities and Signposts
Divergence is our main, most probable scenario. We believe the odds for Nemesis are much lower, but still uncomfortably high.
Markets have not factored in either scenario, creating opportunities for smart investors. Other scenarios are: The current stagnation continues, inflation surges or global growth resumes.
Investment Strategy
To take advantage of Divergence, we would:
- Prefer emerging markets, equities, investment-grade and high-yield bonds, and metals including gold
- Expect poor returns for safe-haven government bonds, the US dollar and the euro
To guard against Nemesis, we would:
- Focus on select alternative investments for possible protection
- Hold cash to exploit short-term opportunities
Inflation and a New World
We believe inflation is unlikely in 2012. Eventually, we expect a move to sustainable global economic growth at just above historical trends. The question is how we will get there and how fast.
In the meantime, markets will be volatile, magnified by elections in key countries. Investors will hunt for safe income in a risky world with low interest rates.