Dubai: According to Sean Daykin, had of investment at the asset management arm of EmiratesNBD, the three "plausible" outlooks for 2012 fall under the headings of: "muddle through"; "re-acceleration", or, a "return to 2008" (remember Lehman Brothers — a bad thing).

The global background for painting these scenarios is the current climate of negativity, well expressed in the front cover of the New York Times' business section on January 1: a baby wearing the 2012 sash balls his eyes out at the new year accompanied by his iPhone and investment charts.

Picking through the probability of three plausible scenarios, Daykin sees the "muddle through" as the most probable (70 per cent probability). Under this scenario, politicians in the US and Europe, together with the international cadre of central banks, will "continue to come up with last minute solutions to prevent crisis. We will get closer to a long-term solution to sovereign debt as the year progresses".

The "muddle through" story, according to Steve Corrin at EmiratesNBD, provides a forecast return of "double figures", diplomatically adding "more like a solid positive absolute performance". As 99 per cent is a double digit return, it's important to note that the achievement of "double digits" would be a number like 10 per cent rather than nine per cent. Investors need to manage their expectations around a few basis points above the rate of inflation as being "excellent".

However, this positive looking muddling has provisions led by the need for China to land softly, and for the US economy to "flat line" and not go into a double-dip recession. Making the point on just how big the US economy is, Corrin pointed said three US companies, ExxonMobil, Verizon and Apple, account for five per cent of the US market by capitalisation; the same value as the entire German market. That's how important the US flat-line is to this equation.

Less probable, but still plausible, Daykin talks of the "re-acceleration" scenario (20 per cent probability). In this story both India and China cut interest rates aggressively leading to reflation and a positive reaction from equity markets and what Daykin calls the "risk on" environment. Also needed is a QE package from the European Central Bank (ECB).

Re-acceleration details

Daykin's "re-acceleration" details requires the ECB to aggressively buy "peripheral bonds" to the point where Spanish and Italian yields fall. With China and India in full flow, US companies start hiring, leading to consumer confidence expressed through consumer spending. The word of warning in this most positive of scenarios ("definitely double digits", said Corrin), is that those exposed to Treasuries would be negatively impacted. Beware the bond market.

The "dodgiest" of our scenarios is the "2008 again" version (10 per cent probability). For this you will need a good sense of humour as the second global credit crunch of our recent times bites led by a "disorderly sovereign default in Europe", China slowing significantly, and the US entering into a double dip recession. All assets will suffer.

In this scenario, Daykin said: "We would cut risk assets if it appears likely".

Daykin also pointed out that the real world is such that a mix of the scenarios is also plausible. However, the headline story, with a 70 per cent probability, is that the global economy will "muddle through". A sort of confidence vote in the realpolitik skills of current politicians?

The key summary point for Daykin is that "muddling through" 2012 is actually good news for investors. Portfolio growth is probable. The caveat is that this is a multi-manager talking. The confidence is based on the manager's ability to move between assets. It is not based on "passive" thinking, but on strategic thought supported by tactical, real-time, decisions if things change. If Doomsday comes they will cut their risk.

 

The writer is Chairman of Mondial Financial Partners.