Schroders' latest economic & strategy Viewpoint by Keith Wade, chief economist, and Azad Zangana, European economist
Global: Themes for 2012
For the macro cycle to turn more deflationary, with both growth and inflation expectations undershooting current expectations.
More sovereign debt restructuring in the eurozone; and
For political risk to increase.
Meanwhile, with no change in interest rates and more quantitative easing expected from the search for yield will remain as strong as ever.
Markets: Risk off Wins
Our themes for 2012 suggest that government bond yields will remain low in the early part of the year with risk off. Lower inflation and slower growth should underpin government bond yields, whilst political risk could well keep risk assets on the sidelines.
Peripheral eurozone bond spreads are likely to remain elevated. Our view that the crisis needs to deteriorate further before decisive action takes place suggests that investors are willing to tolerate negative real yields in the short-run, so that they can preserve their capital for better opportunities further out.
As the year progresses and the macro picture deteriorates we would expect investors to increasingly focus on the likelihood of policy response from the central banks. Consequently we could see rallies in risk assets on hints of easier money.
The pressure to find yield combined with attractive risk premiums should draw investors into both equities, credit and carry trades. However, a sustainable rally will need evidence of stronger recovery in the US and a turn in Europe along with signs that policymakers have got to grips with the euro crisis.