Experts' predictions for 2012

The past year has proved volatile for global financial markets to say the very least.

The first half was dominated with Middle East uprisings, while the latter became dogged with fears for the state of the eurozone.

With each passing week, another country became embroiled in the sovereign debt crisis, prompting a meltdown on global stock exchanges and throwing the future of the euro into jeopardy.

And today, the dire situation shows little sign of being resolved with governments across Europe's southern belt wrestling with record costs of borrowing and faltering economies.

As the year draws to a close, we look at analysts' predictions for 2012.

UK & European economies

While not part of the beleaguered euro, the eurozone debt crisis has engulfed the UK, playing havoc with the stockmarkets and prompting fears for what next year will hold.

Unfortunately for investors, Alex Breese, fund manager at Neptune Investment, believes the extreme macro uncertainty is set to continue into 2012 and as such, expects to see the sub-trend GDP growth levels.

Chief investment officer at Threadneedle Investments Mark Burgess echoed the sentiment: "Whatever happens to the eurozone, the prospects for growth in the developed West are bleak, with the invisible hand of deleveraging set to constrain activity for several years. We have now pencilled in zero growth in the eurozone and the UK for 2012."

Although problematic debt levels at first appeared to be restricted to peripheral European countries, this has now spread to the key European states, shaking global confidence in the region.

"Europe is working on a solution to the debt crisis, but this does not directly solve the current problems in the southern European countries. One or several sovereign debt restructurings and/or leaving of the euro area by one or several countries cannot be ruled out. However any defaults are likely to be orderly, as a disorderly default will be prevented by the European Central Bank [ECB] at all costs," said Robeco in a note.

Asoka Wöhrmann, chief investment officer at DWS, believes the current crisis has proved that the inter-relationship between a central bank and some 17 monetary and economic policies within Europe just does not work.

The key question now for Wöhrmann is: how can the eurozone be stabilised? He has no time for an instrumentalisation of the ECB, rather he is much more in favour of Bundesbank proposals on greater convergence between fiscal policies.

"A sustainable solution requires a clear and transparent agreement on fiscal policy between the 17 countries, including ultimate rights to intervene if standards are breached. Only then can the ECB step in with an interim solution if it becomes necessary," he said.

Ian Kernohan, economist at RLAM, says in the long term, economies such as Greece and Portugal will remain uncompetitive vis-a-vis Germany unless they can engineer internal devaluations via deflation and boost their productivity.

"The Christmas and New Year holidays will provide a well-needed break from constant meetings and discussion on this topic, which is simultaneously boring, terrifying and interesting. In January we will still be faced with a eurozone double-dip recession and policymakers seemingly more intent on making it worse, and loath to use any counter-cyclical monetary or fiscal measures," he added.

Watch what David Buik of BGC Partners makes of next year's challenges in: Economic predictions for 2012.

Global markets

Although a general slowdown in the global economy in 2012 is highly likely, there are nonetheless vast differences between the regional economies.

While the eurozone is set to struggle considerably next year, the US is on track to be the most resilient of the major developed economies thanks partly to the low-interest-rate environment and declining price of commodities.

Leon Cornelissen, analyst at Robeco, said: "For the moment the US economy seems to be defying gravity. The inability of the Super Committee to reach a budget compromise looked to be a threat to growth because of supposedly automatic spending cuts, but Congress has indicated that the payroll tax cut will be extended for another year. The US economy is thus heading for decent growth in the first quarter of 2012 and talk of a double dip is dying down rapidly."

Emerging markets are also set to fare considerably better than Europe, although analysts warn that they are not completely immune to events in the developed world.

"Emerging economies continued to benefit from structural growth drivers but were not completely immune from the slowdown in the developed world, having to raise interest rates in their battle against inflation," said Alec Letchfield, chief investment officer at HSBC Global Asset Management.

Take a look at our guide to BRIC for more on the major developing economies.

However, he believes that "as they continue to grow, there will inevitably be greater spending on domestic infrastructure and an increasingly wealthy population will look to consume more. This will reduce the dependence on exports and with it, make emerging market economies and possibly stockmarkets increasingly guardians of their own destinies."

Hot stocks

2012 will be the fourth year post the financial crisis, yet the global economic outlook is far from shining. Equity markets continue to fall between fear of recession and greed as valuations become ever more attractive.

See the top 10 shares investors turned to in a tumultuous 2011 in: Top of the stocks.

"Despite a clearly slowing macroeconomic backdrop, our core view is that equity markets are inexpensive even in a low-growth environment. Company balance sheets are strong, many businesses are returning cash to shareholders via healthy dividends or share buybacks and valuations are very attraction," said Burgess.

Large defensive stocks are key to buoyant investment trusts in 2012, says Money Observer editor Andrew Pitts. Find out which ones are worth a closer look...

"Companies have generally weathered the storm relatively well, rebuilding balance sheets as margins and cash flows recovered, despite lower revenues, helped by cost-cutting and lower interest rates," said Jane Coffey, head of equities at RLAM.

"Market volatility will remain, therefore I favour those companies able to control their profits and pricing. Balance sheet strength buys a company time and independence from banks and markets during difficult periods and gives more options to increase shareholder value through acquisitions, buybacks and dividend increases."

Letchfield added: "Economic growth is likely to remain under pressure in 2012. Although many European companies have robust finances, a lack of confidence has simply deterred them from investing.

"However, we believe that this ignores two key positive factors which point to a brighter long-term future for investors: first, many firms based in the Western world are increasingly benefiting from profits in emerging markets and, second, while the macro outlook for developed markets may continue to be a drag, emerging market equities look set to benefit from a much more supportive economic environment in the region."