At the beginning of each year, it is often tempting to prognosticate for the upcoming 12 months. Here are some significant themes likely to influence the overall investment markets and global economic environment in 2012.
The U.S. Federal Reserve has committed to keeping short term interest rates at or near zero throughout 2012. The Fed has also indicated it will begin publishing its own forecasts for interest rates over the medium to longer term. This level of transparency will bring a new era to the active management of fixed income portfolios.
Political elections to take place in the U.S., France, Russia and elsewhere. The results of these elections will likely have significant implications for the fiscal and monetary policies of these and other related countries.
Ongoing debt deleveraging pressures in the U.S. and across many of the developed nations will continue to weigh on the sluggish economic recoveries. European sovereign debt concerns will continue to influence the global investment markets. Contagion emanating from European banks and financial institutions will spread across the global financial system.
Residential housing prices in the U.S. will remain generally weak. Geographies already most affected will continue to suffer. The outstanding mortgage foreclosure backlog, specifically in the most depressed areas, will stymie any material recovery in housing prices, due to the selling of foreclosed properties by lenders.
Commodity demand from the emerging economies and long term natural resource acquisition by these countries, mainly China at this point, will keep many commodity prices relatively high. Due to increased housing, infrastructure, manufacturing and consumption demands in these developing nations, raw commodities will remain in high demand.
Developing markets will grow faster than the developed markets. These developing markets will be the growth engines for the global economy.
Geo-political risk will remain high. 2011 witnessed the Arab Spring, the transition of leadership in North Korea, protests in Moscow and continued saber rattling in Iran. Events similar to these will elevate the political tensions during 2012.
The social safety nets provided by most developed economies will be pressured to decrease in order to compete with the developing nations and their lower-cost workforces where the social safety nets are relatively minimal or non-existent. These trends will also influence the election rhetoric in the developed nations.
While these items cover a broad range of topics, events, and concerns, the one certain thing is this list is not inclusive of all the potential factors. Like in 2011, events will unfold in 2012 which have not been sufficiently anticipated and these events will significantly influence investment returns in 2012. Volatility in the global capital markets will continue at an elevated level.
Kirby Brown is the CEO of Beneficial Financial Group in Salt Lake City.