by Russ Koes­terich, Chief Invest­ment Strate­gist, iShares

Recently, I described three pos­si­ble sce­nar­ios for the global econ­omy in 2012. Now, a new out­look piece from the Black­Rock Invest­ment Insti­tute offers even more sce­nar­ios for this year — five to be exact.

The Institute’s out­look, “The Year of Liv­ing Diver­gently,” is the result of a Decem­ber forum that I attended in San Fran­cisco with about 35 other Black­Rock invest­ment strate­gists (I’m a found­ing mem­ber of the Insti­tute). While the Institute’s out­look has more sce­nar­ios than mine, broadly speak­ing its sce­nar­ios and the prob­a­bil­i­ties assigned to each one are sim­i­lar to those in my 2012 piece.

As I men­tioned in my out­look, I think the most likely sce­nario for 2012 is a con­tin­u­a­tion of “The Great Idle”, and I put the chances of this sce­nario occur­ring at about 60%. I expect slow but pos­i­tive global growth, with cer­tain smaller devel­oped mar­kets and emerg­ing mar­kets grow­ing sig­nif­i­cantly faster than other regions.

The Insti­tute has a sim­i­lar base case sce­nario for 2012, which it calls “Diver­gence,” and assigns it a 40% to 50% chance of occur­ring. This sce­nario describes a world in which the global econ­omy avoids a reces­sion, but there are sig­nif­i­cant diver­gences in the economies of dif­fer­ent regions. In this sce­nario, Europe is the worst posi­tioned for 2012 and expe­ri­ences a reces­sion. Mean­while, the United States and Japan mud­dle through and emerg­ing economies con­tinue to outperform.

For the Diver­gence sce­nario, the paper advo­cates an over­weight posi­tion in equi­ties, cor­po­rate bonds and met­als, includ­ing gold. Within equi­ties, I would advo­cate an over­weight to emerg­ing mar­kets, energy and nat­ural resources stocks.

The Insti­tute and I also agree on the sec­ond most likely sce­nario for 2012: A Global Mar­ket Crash. The Insti­tute calls this sce­nario “Neme­sis” after the Greek god­dess who pun­ishes the proud. The Insti­tute ascribes a 20% to 25% prob­a­bil­ity to it (slightly lower than the 35% odds I put on it).

A dis­or­derly default or bank­ing cri­sis in Europe would be the most likely trig­ger of the Neme­sis sce­nario, although other pos­si­ble cat­a­lysts include US pol­icy mis­takes or hos­til­i­ties between Israel and Iran. If this sce­nario were to occur, it would be char­ac­ter­ized by a global reces­sion, global credit crunch, social upheaval and steep losses across asset classes.

Under the Neme­sis sce­nario, there are unfor­tu­nately few places to hide other than cash and US, Ger­man and Japan­ese gov­ern­ment bonds.

When it comes to the dif­fer­ences between the Institute’s out­look and mine, the largest one is that the Insti­tute offers five sce­nar­ios ver­sus my three. Why the dif­fer­ence? The Institute’s out­look divides my “Great Idle” base case into two more gran­u­lar sce­nar­ios: Diver­gence and Stag­na­tion, which is essen­tially a con­tin­u­a­tion of today’s slug­gish global growth.

In addi­tion, the Insti­tute offers a sce­nario where infla­tion occurs around the world and ascribes a 5% to 10% prob­a­bil­ity to it. Though I believe this sce­nario is a pos­si­bil­ity over the longer term, I didn’t include it in my out­look because it has a very low prob­a­bil­ity of hap­pen­ing in 2012.

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