By: James Solloway, CFA, Managing Director, Senior Portfolio Manager
The Global Portfolio Strategies Group recently released its fourth-quarter economic outlook. A summary of its conclusions is provided below:
Europe’s debt crisis will continue to fester, although the endgame–including a restructuring of the eurozone–is within sight.
We expect recessionary conditions in much of Europe in the early part of next year.
The U.S. should avoid a recession. However, as has occurred in each of the past two years, there will likely be growth scares that temporarily pull down equity prices.
Emerging economies should continue to grow more quickly than developed markets, although the banking crisis in the eurozone will hurt the prospects of Eastern Europe.
China’s slowing growth could depress growth rates elsewhere in Asia.
SEI looks for another year of easy monetary policy in the U.S. and a further shift toward easing by the european Central Bank, as the latter combats recession and the impact of the sovereign debt crisis on the banking system.
Even in a scenario where the eurozone remains intact, we believe the euro itself could come under substantial downward pressure.
We expect inflation to remain mostly inactive for another year. However, unpredictable, high-impact events (so-called black swans), along the lines of last year’s Arab spring and Japanese earthquake/tsunami/nuclear meltdown, cannot be ruled out. Obvious candidates include an uncontrolled breakup of the eurozone, intensifying political and military tensions with Iran over its expanding nuclear capabilities and a political and economic collapse of North Korea in the wake of ruler Kim Jong Il’s death.
In terms of active asset allocation, we took advantage of the pop in stock prices during the final quarter of 2011 to even up our stock/bond positioning relative to strategic weights in the portfolios over which we have discretion. However, we continue to favor high-yield fixed-income assets versus investment-grade and sovereign debt. Within equities, we are overweight U.S. large-cap versus international, and remain particularly cautious on Europe ex-U.K. We also believe the exchange value of the euro could be at risk.
Read Jim’s full analysis – Pivotal Year Ahead