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2012 a year of potentially binary outcomes, Schroder says
While Schroder Investment Management (Hong Kong) Ltd forecasts that the MSCI World index will decline 20 percent in the event of a European Union break up, it also notes that a move to quantitative easing in Europe will see a 15 percent rise in the same index. Neither is the asset managers’ central scenario although Richard Coghlan, head of the firm’s multi asset, says that 2012 presents a year of “potentially binary outcomes”.
Oliver Jones 20 Jan 2012
While Schroder Investment Management (Hong Kong) Ltd forecasts that the MSCI World index will decline 20 percent in the event of a Eurozone  break up, it also notes that a move to quantitative easing in Europe will see a 15 percent rise in the same index. Neither is the asset managers’ central scenario although Richard Coghlan, head of the firm’s multi asset, says that 2012 presents a year of “potentially binary outcomes”.
 
On the plus side, the US economy is expected to continue to recover, with a whittling away of excess supply raising hopes of a pick up in housing starts this year. Coghlan notes that “up until now, much of the recovery has been fuelled by fiscal pump priming”, with a pick up in housing starts in the US presenting the prospect of a more sustained recovery.
 
Housing construction normally accounts for 4.5 percent of US gross domestic product (GDP) – peaking at 6.5 percent and closer to 2.5 percent at present. Coghlan adds that housing starts are now 600,000 units below trend after languishing post-crisis, compared to a position of 800,000 units pre-crisis. In short, net supply growth is “more in line with trend” although the impact of the housing construction bubble endures in parts of the US.
 
At the same time, the ongoing crisis in Europe presents the “potential for deep recession accompanied by political instability”, suggesting “another year of extreme volatility with sharp falls followed by solid gains”. Coghlan observes that correlation between asset classes remains high and that “all markets would suffer in a Europe meltdown”.
 
Overall, Asian equity markets “offer good value”, with price-earnings and price-book ratios at the lower end of historical range. At the same time, the Asian credit market “also looks attractive”, with better than average yields combined with lower default rates.
 
A January 6-12 survey of 286 fund managers conducted by Bank of America Merrill Lynch found that only three percent of investment managers believe that the global economy will weaken in 2012, up from more than a quarter in the December survey.
 
Schroders’ negative scenario is based on a -0.7 percent change in world GDP. In its recently released global growth outlook, the World Bank warned that global growth could be 3.8 percent lower than its 2.5 percent forecast for 2012 (or -1.3 percent) in the event of a credit squeeze in the Eurozone’s largest economies.

  

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