Global Investing

It’s just over a month until everyone winds down for a Christmas break — this means the season for the 2012 outlook briefings by various managers is starting.

Among the first I went to was ING Investment Management, which held the briefing this morning. Eric Siegloff, global head of strategy and tactical allocation, reckons the next year’s key theme affecting asset classes is summarised as CCC — crisis, contagion and credibility.

He believes 2012 is going to be an uncertain environment with the crisis in the banking system and the foundations of the euro zone threatening to spread beyond EU (contagion), hitting credibility of policymakers.

2010 was DDD — deleveraging, dealing with systemic risk and disinflation, and 2011 was about DIY — dividend, income and yield. To some extent the DIY theme carries on into 2012 where investors must allocate their portfolio into riskier but higher-yielding assets in order to get extra returns at a time when average returns remain low across various asset classes.

According to ING’s base case scenario, world equities are expected to gain 5 percent in 2012, compared with 2 percent in Treasuries and 7 percent in real estate. However, equities have 20 percent upside potential, and 15 percent downside potential — making it a very volatile world.

The crisis of confidence in Greece's fiscal health has dented U.S. equities, though not enough to compromise a budding American economic recovery. Even a significant slowdown in European growth prospects might have limited immediate impact on the United States. However, that benign backdrop could vanish, economists at Morgan Stanley say, if the Greek situation were to turn in to an outright credit crisis.  They call it the "contagion tail risk":

While the retreat in risky assets in the past few weeks is not yet a headwind for growth, it is hardly a plus.  If the crisis spills over into broader risk aversion and a drying up of liquidity — the functional equivalent of the US subprime crisis — the consequences could be more dire.

JP Morgan, for its part, notes that it's not just Greece investors need to worry about.