The economic outlook for 2012
In the month of August alone, around $6 trillion was wiped off global equity valuations as the markets spiralled downwards. But what does 2012 hold in store? More doom and gloom or a positive uptick in the global economic environment?
Schroders is the most bearish of the lot, predicting deep stresses in the eurozone area continuing into next year. Azad Zangana, European economist at Schroders, is assuming the eurozone crisis will continue to escalate in 2012, negatively impacting the UK economy.
He is forecasting a dip of 0.4% in GDP, as well as a spike in unemployment to 9.1% at the end of 2012. He is adamant that the UK will fall into recession next year, although it "won't be as deep as the 2008/9 crisis". As for interest rates, the economist predicts they will be on hold until at least 2014 while the market recovers.
Zangana is positive on inflation, though, as "the natural fall in inflation next year will support households, leading to stronger consumer spending."
As for where to invest next year, Zangana and chief economist at the investment manager, Keith Wade, believe the US high-yield market offers some good opportunities. Likewise, David Harris, senior portfolio manager of the Schroder US Fixed Income fund, believes US corporate bonds could perform well in 2012 – but he is steering away from government bonds completely.
Bill O'Neill at Merrill Lynch Asset Management argues instead that investors need to focus on investments that offer yield, quality and diversification – but that the global economy will only experience "fragile growth" in 2012. "Global economic growth at 3.7% will be led by emerging markets," he says. O'Neill is bearish on commodities going forward, with gas and oil - "two of 2011's strongest performing assets" - unlikely to replicates their success next year. Gold, in particular, is likely to be held back by the US dollar's strength, he adds.
Whereas some fund managers see value in cheap European stocks, O'Neill recommends being underweight in the area, as although they are cheap and sentiment is at rock bottom, the eurozone crisis still poses too much of a risk.
As for better-performing sectors, O'Neill forecasts strength in the UK commercial property market, with a focus on the prime sector; as well as large-cap UK and US stocks in the consumer discretionary, consumer staples and information technology sectors. He also expects investment-grade and high-yield corporate bonds to perform well, especially in the US.
Private bank Coutts is predicting that the search for income will be "one of the most important goals for investors" next year as the global economic environment remains bleak.
"The future of the euro remains centre-stage and this will continue to dominate the economic agenda in 2012, synchronised unfortunately with the multi-year theme of reducing debt levels across both the US and the UK," the bank's economists say.
Coutts is forecasting gold – as well as emerging market debt and corporate bonds – to be "better placed" than global government bonds.
Although it concedes gold is "not immune" to market volatility, drivers such as negative real yields from interest rates give a positive outlook for the asset class.
"Gold is looking more attractive than other commodities as it is less likely to be affected by the lack of global growth," the bank adds.
Overall, the bank expects equities to perform better than fixed income.
There's trouble ahead in the bond markets, according to Fidelity's Trevor Greetham. The eurozone crisis will continue to pose an extraordinary problem to the stability of the UK economy – and 2012 will be "make or break" for the euro currency.
While he expects all 17 member states to remain in the eurozone, if Germany leaves (which he admits is a distinct possibility), the banking sector and European export market will be left "for dead".
As for the close of the FTSE 100 next year, Greetham predicts a binary result: 4500 if the eurozone crisis persists, or 6500 if a credible solution to the debt crisis is found. "All in all, things look bleak in the near term," he adds.
However, Greetham believes things will pick up during the latter part of 2012. "A bullish case can be made for 2012," he says. "It rests on a US-led economic upswing strong enough to offset anticipated weakness in the European economy, and it assumes the worst-case scenario of a messy euro break-up can be avoided."
US equities could perform well due to their defensive qualities, says Greetham, and he is also favouring gold as a defensive asset. Diversification remains the most important part of investment for 2012, as "investment conditions remain difficult" across the board.
Jeremy Tigue, manager of the Foreign & Colonial investment trust, believes politics will continue to be a huge issue in 2012 with limited decisive action taking place while some major world leaders attempt to keep voters on side in the run-up to elections.
Next year there will be elections in China in January, Russia in March, France in April and the US in November. In Tigue's view, the result of such political procrastination will be that the crisis in the eurozone will rumble on.
He comments: "The eurozone desperately needs to take action against a rising tide of contagion and 2012 will be make or break for them. The three most likely outcomes are quantitative easing, full fiscal union or a break-up of the eurozone in its current guise."
Tigue predicts global growth of around 2-3% in 2012 (rather than the 3-4% widely predicted). But he is more upbeat on dividends – "the dividend outlook is robust" – and specific regions of the world. "The best growth potential is in the emerging markets. Big multinationals like Unilever that are expanding there could do well." Tigue adds that the US, with its confident consumers and world-leading companies, could also perform well in 2012.
This article was written for our sister website Money Observer
Investment trusts are companies that invest money in other companies and whose shares are listed on the London Stock Exchange. As with unit trusts, private investors buying shares in an investment trust are buying into a diversified portfolio of assets (to reduce risk), which is managed by a professional fund manager. Investment trusts differ from unit trusts in two important ways: they are listed on the stockmarket and so are owned by their shareholders and are closed-ended funds with a finite number of shares in issue. This means the share price of investment trusts might not reflect the true value of the assets in the company (known as the net asset value, or NAV) and if the NAV value of a share is £1 and the share price in the market is 90p, the trust is said to be running a discount of 10% to NAV. But this means the investor is paying 90p to gain exposure to £1 of assets. Investment trusts can also borrow money and use this money to buy investments. This is known as gearing and a geared trust is thought to be more of an investment risk than an ungeared one.
Lower interest rates encourage people to spend, not save. But when interest rates can go no lower and there is a sharp drop in consumer and business spending, a central bank’s only option to stimulate demand is to pump money into the economy directly. This is quantitative easing. The Bank of England purchases assets (usually government bonds, or gilts) from private sector businesses such as insurance companies, banks and pension funds financed by new money the Bank creates electronically (it doesn’t physically print the banknotes). The sellers use the money to switch into other assets, such as shares or corporate bonds or else use it to lend to consumers and businesses, which pushes up demand and stimulates the economy.
The general term for the rate of income from an investment expressed as an annual percentage and based on its current market value. For example, if a corporate bond or gilt originally sold at £100 par value with a coupon of 10% is bought for £100 then the coupon and the yield are the same at 10%, or £10. But if an investor buys the bond for £125, its coupon is still 10% (or £10) and the investor receives £10 but as the investor bought the bond for £125 (not £100) the yield on the investment is 8%.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
A market-weighted index of the 100 biggest companies by market capitalisation listed on the London Stock Exchange. It is often referred to as “The Footsie”. The index began on 3 January 1984 with a base level of 1000; the highest value reached to date is 6950.6, on 30 December 1999. The index is “weighted” by how the movements of each of the 100 constituents affect the index, so larger companies make more of a difference to the index than smaller ones. To ensure it is a true and accurate representation of the most highly capitalised companies in the UK, just like football’s Premier League, every three months the FTSE 100 “relegates” the bottom three companies in the 100 whose market capitalisation has fallen and “promotes” to the index the three companies whose market capitalisation has grown sufficiently to warrant inclusion. Around 80% of the companies listed on the London Stock Exchange are included in the FTSE 100.
If you own shares in a company, you’re entitled to a slice of the profits and these are paid as dividends on top of any capital growth in the shares’ value. The amount of the dividend is down to the board of directors (who can decide not to pay a dividend and reinvest any profits in the company) and they will be paid twice yearly (announced at the AGM and six months later as an interim). Dividends are always declared as a sum of money rather than a percentage of the share’s price. Although dividends automatically receive a 10% tax credit from HM Revenue & Customs (HMRC), which takes the company having already paid corporation tax on its profits into account. Dividends are classed as income and, as such, are liable for personal taxation and so shareholders have to declare them to HMRC.
Generic, loosely-defined term for markets in a newly industrialised or Third World country that is in the process of moving from a closed economy to an open market economy while building accountability within the system. The World Bank recognises 28 countries as emerging markets, including Argentina, Brazil, China, Czech Republic, Egypt, India, Israel, Morocco, Russia and Venezuela. Because these countries carry additional political, economic and currency risks, investors in emerging markets should accept volatile returns. There is potential to make large profit at the risk of large losses.
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).
A term applied to raw materials (gold, oil) and foodstuffs (wheat, pork bellies) traded on exchanges throughout the world. Since no one really wants to transport all those heavy materials, what is actually traded are commodities futures contracts or options. These are agreements to buy or sell at an agreed price on a specific date. Because commodity prices are volatile, investing in futures is certainly not for the casual investor.
The total money value of all the finished goods and services produced in an economy in one year. It includes all consumer and government consumption, government spending and borrowing, investments and exports (minus imports) and is taken as a guide to a nation’s economic health and financial well being. However, some economists feel GDP is inaccurate because it fails to measure the changes in a nation's standard of living, unpaid labour, savings and inflationary price changes (such as housing booms and stockmarket increases).