Areas of growth await institutional investors in the new year, though liability issues and the European crisis could cause some significant challenges, according to separate outlook reports from Mercer and Russell Investments.
Mercer's Key Economic and Financial Challenges for 2012 report said “respectable” global growth could be seen in 2012 with an improving U.S. economy and continued strength of emerging markets.
Among challenges to plan sponsors, especially in the U.S. and the U.K., is that traditionally “safe-haven” bond investing is deteriorating funded status by increasing liabilities, according to Andrew Kirton, global chief investment officer for Mercer.
“For lovers of irony, it's somewhat of a delicious situation to be in,” Mr. Kirton said in a telephone interview.
Another challenge is “how to fill the gap by these banks that can't afford to lend, particularly here (in the U.K.),” Mr. Kirton said.
Investors with a “defensive mindset” should focus predominately on companies with visible and sustainable cash flows.
“Don't be too dogmatic about how you invest prudently,” Mr. Kirton said. “We talk in terms of least-risk assets … building a broader array of defensive assets that build a more real return.”
Russell's 2012 Global Outlook states the key risk to improved market sentiment is the euro, and that China and Asian emerging markets, along with the U.S., will contribute as “engines of growth for global gross domestic product.”
“While we are more confident on the U.S. and China forecast with each data release, we are acutely aware that forecasting political outcomes is very difficult. We believe that Europe will remain a source of systemic risk,” Peter Gunning, global chief investment officer of Russell, said in a news release.
Also, market volatility levels will likely remain elevated and corporate earnings will slow, according to the Russell report.
Much of the volatility is due to the 20% probability of a catastrophic financial meltdown in Europe and how that percentage seems to waver above and below that mark, according to Mike Dueker, chief economist of Russell.
Russell's index targets for the equity markets at the end of 2012 are U.S. 10-year Treasury yield between 2.5% and 2.75%; Russell 1000, 720; and S&P 500, 1,300.