Economy to remain in ‘Great Idle’, says iShares Chief Strategist

Jan 5th, 2012 | By | Category: Fixed Income

The risk of a double-dip recession has increased to 35%, according to Russ Koesterich, Chief Investment Strategist at ETF provider iShares.

Economy to remain in ‘Great Idle’, says iShares Chief Strategist

Global economy can muddle through, though risk of recession as a result of policy mistakes remains viable, says Koesterich.

However, he argues that the most likely outcome remains that the global economy will continue to grow, albeit very slowly, in a scenario he calls the ‘Great Idle’.

Koesterich says that despite hopes that the worst of the 2008/9 global financial crisis was behind us, 2011 reminded investors that credit bubbles have long-lasting effects.

Several unexpected events, such as the natural disaster in Japan, which caused massive devastation as well as disruption to global supply chains, and the Arab Spring in North Africa and the Middle East, which caused a spike in crude oil prices, weren’t on anyone’s radar screen coming into the year.

Moreover, these events coincided with a near perfect streak of policy missteps – namely political paralysis in both the US and Europe relating to the debt ceiling and the ongoing debt crisis, respectively – thereby exacerbating an already difficult situation.

The net result, he says, was to take what was always going to be a difficult year and turn it into an excruciating one.

Looking forward to 2012, Koesterich’s baseline prediction is that the global economy will continue the ‘Great Idle’ – slow but positive growth – though he places a higher probability on the risk of global recession this year than he did last year.

In terms of projections, he outlines three possible scenarios for the coming year. These scenarios are listed below, alongside which we highlight a number of potential ETFs.

1. Economy remains in the Great Idle

Probability: 60%

What it looks like: Growth remains anaemic, but crisis is avoided.

Strategy: Overweight high-dividend mega-cap stocks, smaller developed markets, emerging market equities, and corporate bonds.

Potential ETFs: SPDR S&P US Dividend Aristocrats ETF,  iShares MSCI Canada ETF,  Credit Suisse MSCI Australia ETF,  PowerShares FTSE RAFI Emerging Markets ETF,  DB X-trackers IBOXX € Liquid Corporate 100 Non-Financials ETF

2. Crisis and global recession

Probability: 35%

What it looks like: Policy failure in Europe leads to a banking crisis and severe recession. Fiscal austerity in United States slows growth

Strategy: Overweight US Treasuries, gold, and global mega-caps.

Potential ETFs:  Lyxor iBoxx $ Treasuries 1-3Y ETF,  SPDR Barclays Capital US Treasury Bond ETF,  Source Physical Gold ETC,  iShares Dow Jones Global Titans 50 ETF

3. Growth accelerates

Probability: 5%

What it looks like: Emerging markets resume stellar growth and the developed world reverts to its long-term mean.

Strategy: Overweight European equities, emerging markets and cyclical stocks. Underweight US Treasuries.

Potential ETFs:  EasyETF STOXX Europe 600,  HSBC MSCI Emerging Markets ETF,  Amundi MSCI Europe Consumer Discretionary ETF,  DB X-trackers US Treasuries Short Daily ETF

In short, Koesterich believes that the global economy can continue to muddle through, though the risk of a global recession as a result of policy mistakes in Europe as well as the United States remains a viable possibility.

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