Export slowdown significant threat - investment expert

The biggest danger the world's economies face in 2012 is a significant slowdown in export demand, as Europe slides into recession, a global investment expert says.

Russell Investments' team of global investment strategists have today released the firm's 2012 Global Outlook, in which they predict that global deleveraging will continue through 2012.

The outlook noted that "it took three decades for the developed economies to borrow too much money and it will take years to pay it back."

Against this backdrop however, Russell has forecast that investors can expect to see modest levels of recovery and growth overall, driven by Asia and the United States.

Pete Gunning, Russell's global chief investment officer, said he anticipated continued volatility, especially as Western democracies reconciled the need for austerity with the need to support economic growth and provide for rising outlays on entitlements.

“However, we do expect to see more clarity around the impacts of the proposed solutions to this year's headline-dominating policy issues globally," Mr Gunning said.

Andrew Pease, Russell's chief investment strategist, Asia Pacific, said 2012 would be a year of dealing with external shocks after facing the internally-generated threats of inflation and overheating in 2011.

"While Asia will not be immune to tighter credit conditions in Europe, we do see some positive news coming out of the region,” Mr Pease said.

“Inflation appears to have peaked, share market valuations are attractive across the region and China, specifically, has scope to significantly ease monetary conditions."

Russell's 2012 outlook said in all probability, the two engines of the Chinese and United States economies will ignite and drive global growth. Assuming this was the case, and if Europe could stabilise its deepening sovereign debt crisis, Russell believed this would result in a notable positive for risk assets.

"While we are more confident on the US and China forecast with each data release, we are acutely aware that forecasting political outcomes is very difficult, Mr Pease said.

“We believe that Europe will remain a source of systemic risk."

The ongoing crisis in Europe would also likely sap the strength of emerging market asset classes − at least temporarily − as these emerging economies are weighed down by the tightening of credit globally, the knock-on effects to growth and liquidity, and sustained risk aversion, the outlook said.

Despite this, Russell expected that strong fundamentals would mean that emerging markets will benefit from a return to risk.

According to Russell, attention to every detail will matter more than ever for investors - every basis point earned will be hard fought, and regional diversification will need to be firmly in place.

"Making gains this year will require an active, global, multi-strategy approach and identifying outperforming managers in every sector and region will count more than ever," Mr Gunning said.

"Gaining access to non-traditional securities through alternatives will also be a key potential return enhancement strategy.

“In a world of increased volatility and lower returns, we believe a dynamic approach to investing to take advantage of opportunities as they present themselves will increasingly become the norm for successful investors."