• Fiscal austerity will continue in 2012 and beyond, limiting growth in DM economies. As of mid-November 2011, consensus forecasts saw U.S. GDP growth in 2012 at just above 2%, although the outlook was a little better in December because of congressional action. J.P. Morgan’s Investment Bank expects global GDP growth of only 2% in 2012, which is a full percentage point below the 1992-2011 annualized average.
• Government yields will likely be lower. The broad trend for government yields in 2012 is lower, with the ECB catching up to its G-5 peers, and a bias for more quantitative easing from the Bank of England and the Bank of Japan. J.P. Morgan predicts the U.S. 10-year yield will hold below 3% in 2012.
• EM growth should return. Although global growth will face headwinds from fiscally tightening developed markets, a partial offset will come from emerging markets, where policymakers will be easing monetary and sometimes fiscal policy to support growth. The differential between EM and DM growth, which narrowed to 3% in the second half of 2011, should return to a more typical 4.5 or 5% in the year ahead.
• Within EM, the BRIC countries are worth watching. Although Brazil, Russia, India and China (BRIC) have underperformed overall for the past two years, China, Brazil and perhaps India could begin reversing that trend in 2012. China and Brazil are now leading the EM easing cycle, and growth should begin by spring.
• Healthcare and technology will be a source of growth. Although J.P. Morgan predicts EM performance will be positive in 2012, they also think investors can “source growth” for portfolios in developed markets through innovation, with particular focus on technology and healthcare.
• Interest in alternatives will increase. Because market volatility is likely to remain high this year, J.P. Morgan expects to see greater interest in alternatives, as investors become more willing to trade liquidity for better Sharpe ratios.
• Pensions’ funding status will remain bleak. The outlook for pensions’ funding status in the U.S. and U.K. is not much brighter this year than it was in 2011. J.P. Morgan recommends investors consider strategies to try to reduce the volatility of the funded status; use market volatility to their benefit by locking in any funding improvement; and diversify growth assets to manage portfolio risk.- Corie Russell
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