Europe's crisis to remain a source of market volatility

Abu Dhabi: Tools to resolve the lingering Eurozone debt crisis are on the table and a workable treaty could be ready by the end of the year, according to Markus Schomer, chief economist at New York-headquartered PineBridge Investments.

He added, however, that although the treaty may not end the Eurozone crisis immediately, it will start the process of restoring investor confidence in the Eurozone sovereign bond market.

"First, the European Central Bank has demonstrated its willingness to play a bigger role in addressing the liquidity crisis through large, longer-term refinancing operations. Second, all countries [except the UK] have agreed on a new, much stricter fiscal compact that will restrain countries from running budget deficits," Schomer said.

"Third, although Germany is still pushing back, an increase in the size of the rescue fund to possibly €1 trillion (Dh4.84 trillion) looks increasingly likely. This will allow the EU to buy up the debt of struggling members.

"Fourth, the debate is shifting to a new growth pact that must involve structural reforms, priv-atization and increased transfers."

Improving US outlook

Schomer added: "The Eur-opean Union's sovereign debt crisis has been and is likely to continue to be a source of significant market volatility in 2012.

However, more important for risk asset returns this year will be the improving US economic outlook and monetary policy easing in Asia. Investors remaining cautious about the EU sovereign debt crisis are likely to miss out on a rebound in global equity markets this year."

Turning to the Middle East and North Africa (Mena) region, Schomer said stock valuations here are attractive and growth in the region is rebounding.

He cautioned, however, that the domestic political unrest in several states and rising tensions between the West and Iran could weigh on investor sentiment.

Schomer also said he expected oil to trade sideways in 2012. "Global economic growth is set to be similar to last year, which means demand growth shouldn't change significantly either. Geopolitical risks could put more upward pressure on oil prices, yet the waning of central bank liquidity support should lead to outflows from commodity markets," he said.

"We are bullish on the US dollar. First of all, the dollar is still significantly undervalued against most other currencies judging from purchasing power parities," added Schomer.

He said growth in the US is picking up while it is slowing in many other parts of the world and monetary policy is being eased in many parts, while the Fed is likely to stand firm.

"All reasons to expect a stronger dollar this year," Schomer said.

Pinebridge Investments, which has offices in 31 countries, managed $69.5 billion (Dh255.2 billion) in assets as of last September 30.

• $1tr: expected increased size of EU rescue fund
• $69.5b: funds managed by PineBridge Investments
• 31: countries where PineBridge has offices