by Russ Koesterich, Portfolio Manager, 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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