The US and Asia Will Lead the Way in 2012

With 2011 winding down, we’re now casting our gaze toward 2012 economic growth. Although the eurozone will likely experience a recession of some sort, we believe that relatively strong growth in emerging markets and the US will support respectable global economic growth.  

The US economy has once again defied the perma-bears by avoiding a recession in 2011, as we predicted in October 2010. We also believe that there will be no US recession in 2012.  US gross domestic product (GDP) should grow by more than 2 percent next year because the country’s fiscal and monetary authorities and the political establishment will do anything in their power to stave off a recession during a presidential election year. It’s true that the US economy still faces structural problems that will have to be addressed sooner or later. But with the EU economy in dire straits, don’t expect drastic action from the US anytime soon.

Meanwhile, emerging markets will be the standard bearers for global economic growth in 2012. Depending on the level of political paralysis in India next year, emerging markets as a whole could deliver economic growth of about 5 percent.  

Once again, China will be the main engine of growth. The country’s GDP should grow by at least 8 percent in 2012, especially if the Communist Party manages to cool China’s red-hot property market without killing it. China’s property market will be the primary concern for the country’s economic policymakers next year. The fear is that the central government’s reluctance to ease economic policies by midyear could result in a crash of the country’s real estate markets. Although the Chinese government does not have an unblemished record when it comes to managing the property markets, we’re inclined to give them the benefit of the doubt.  

We’ve made several assumptions when building our investment strategies for 2012. First and foremost, we assume that Europe will slip into recession for some portion of next year. However, we also expect that EU policymakers will seize the opportunity to implement changes necessary for preserving the euro and move toward a closer fiscal union among eurozone members. The euro will weaken next year but the eurozone will hold together; the major European powers are still better off with the euro in place. If our assumptions prove correct, global GDP should expand by about 3.5 percent in 2012.

The spreading EU sovereign-debt crisis and anemic growth in the US may intimidate many investors. And it’s true that things may get worse before they get better, particularly in Europe. True change is always a laborious process. But if Europe’s political establishment is not determined to crash and burn, and if the Continent truly aspires to wield more influence in the new global economic order, they will prevent the EU from sliding into the abyss.  

As German Chancellor Angela Merkel recently noted, time is running out for action. The markets have relentlessly punished the EU by driving up the yields on sovereign bonds and making the debt burden impossible for almost all countries. The German political and industrial establishment knows that, contrary to popular belief, the majority of German exports still go to Europe. Consequently the euro remains more beneficial for Germany than an extremely strong Deutsche Mark, especially because exports account for about 40 percent of the country’s GDP. We expect that Germany will surprise the market with more pro-Europe actions, so long as the fiscally weak peripheral European nations hold up their end of the bargain.

Nevertheless, the euro should weaken as we enter 2012. Note that according to the European Central Bank’s (ECB) own estimates, a 10 percent weakening of the euro adds about 0.7 percent to the eurozone’s GDP in the first year and 1.2 percent in the second year.

Nevertheless, the situation in Europe remains uncertain. Investors should expect the ECB to cut rates again, maybe as early as next week, and certainly early in 2012. Furthermore, extensive support to the union’s banks should also be expected along with further interference in the bond market.  

In the shorter term, we believe that emerging markets most likely bottomed at the end of October and that any available liquidity should find its way to the stock market sooner or later.

Although we’re still formulating our official forecasts for global markets, a rally now can be a precursor of what’s to come. The situation is delicate and things can go awry in a hurry. But it’s important to remember that most investors aren’t positioned for a year-end rally, even a short one.

Turning to our coverage universe of global markets, South Korea, Russia, Taiwan and China look like the best bets on a short-term bounce. Value investors should also consider South Korea and Russia because the two markets trade at low valuations compared to their peers.

Europe can also provide investors with tidy profits in a rally, but this is a game for the more adventurous. The fundamentals in Europe are not nearly as favorable as they are in emerging markets. That being said, Italy offers the most potential of all EU nations, as the country is faced with a liquidity crisis and not a solvency problem. Italy’s net foreign debt is just a little more than 20 percent of GDP, the country’s banks are in a relatively good position, and its stock market is the second-cheapest in the eurozone after Greece.