Bob Doll Sees a “Slow Growth” World; Europe Slips into Recession as
US Stocks Post Double-Digit Gains
Europe the Big “Swing Factor”; World Can Have an “Okay” Year If
Europe Avoids Disaster
US Economy Will Grow by 2-2.5 Percent, But Corporate Earnings Won’t
Meet Expectations
The BlackRock Investment Institute (BII) sees 2012 as “The Year of
Living Divergently”
NOTE TO EDITORS AND READERS: A more extensive version of the
following release, with Bob Doll’s commentary on his predictions for
2012 and an explanation of his scoring on his predictions for 2011, is
available at the News section of the BlackRock website, http://www2.blackrock.com/global/home/News/NewsHome/index.htm
NEW YORK--(BUSINESS WIRE)--
2012 will offer investors a slow-growth world in which the United States
will face headwinds, yet still achieve positive economic growth, and
Europe will likely slip into recession while avoiding more dire
financial contagion, according to Robert C. Doll, Chief Equity
Strategist for Fundamental Equities at BlackRock, Inc. (NYSE: BLK).
Growth will continue to be hampered by the lingering effects of the
global “credit bust,” including ongoing deleveraging partially offset by
the forces of accommodative monetary policy in much of the world.
Despite the ongoing debt crisis, however, an environment of modest
economic growth will still allow corporate earnings to expand. This
backdrop will allow equity markets to move higher, led by the U.S.
According to Doll, the most significant global risk remains financial
breakdown in Europe, which would tip the entire developed world, if not
the emerging world, into a new recession. “In 2012, the big swing factor
for the world economy will be the success of the continuing effort to
fix Europe’s debt and credit issues,” Doll said. “Failure to advance
this effort could be disastrous.”
“At the same time, we don’t need Europe to solve all of its problems in
2012 for the world to achieve an ‘okay’ year,” Doll said. “Since there
is already such a significant ‘crisis premium’ baked into the markets,
just avoiding disaster could be enough.”
In addition to movement in Europe toward resolution of its debt crisis,
Doll’s “what can go right” list for 2012 includes the U.S. heading
toward fiscal responsibility, the emergence of a US manufacturing
renaissance, a housing recovery, and/or an increase in confidence. On
his list of key downside concerns are a systemic banking crisis in
Europe, a true double-dip recession in the United States, a hard landing
in China, a break-out of class warfare in the U.S., and a Middle East
flare-up resulting in $150-per-barrel oil.
“In 2012, the world will most likely take a middle course that will
avoid both the positive and the negative extremes, but also leave a host
of critical issues unresolved,” he said. “Nevertheless, this middle
course should be good enough to get investors off the sidelines, put
their cash to work, and move into higher-risk assets. This bodes well
for the stock market.”
The BlackRock Investment Institute (BII) sees 2012 as “The Year of
Living Divergently”
For well over a decade, Doll has been publishing his annual outlook and
“10 Predictions” for the year ahead in the financial markets and the
economy.
His commentary this year is complemented by the release of “2012: The
Year of Living Divergently” by the BlackRock Investment Institute
(BII), which examines key forces likely to drive the global and
national economies in 2012 and presents several potential scenarios for
the coming year (to read the full BII commentary please Click
here).
The BII’s consensus is that in 2012, the world will likely
experience a growing “divergence” between the faster-growing emerging
markets and the debt-ridden developed world, in terms of their real
economies and asset prices. Under the “divergence” scenario, emerging
economies (including China) will lead the way in terms of growth, while
the US economy muddles on and Europe undergoes recession followed by
slow recovery in 2013.
At the same time, however, the BII consensus also sees a real
possibility of a far more challenging “nemesis” scenario sparked by an
out-of-control European debt crisis. Such a scenario would result in a
global recession, a credit crunch and steep losses across asset classes
around the world.
The BlackRock Investment Institute is a global platform launched
in 2011 that leverages the firm’s expertise in markets, asset classes
and investor segments to generate investment insights. The BII’s “2012:
The Year of Living Divergently” represents a consensus view among
leading BlackRock portfolio managers including Doll.
A “Muddle Through” US Economy Grows by 2-2.5 Percent
Doll believes that in the United States, a strong corporate sector, an
improving consumer sector, and a financially strapped government sector
will combine to provide modest but positive growth for all of 2012.
While there will likely be some disappointments and positive surprises
along the way, Doll is expecting an average growth rate of between 2 and
2.5 percent for the year. “As with the world generally, the US economy
can achieve an ‘okay’ year just by continuing to muddle through,” he
said.
“Recession fears could re-emerge but we won’t see one unless conditions
in Europe deteriorate dramatically leading to the ‘nemesis’ scenario
outlined by the BII,” Doll said. “Our expectation is that unemployment
will continue to fall and jobs growth will proceed, but both at
disappointing rates.”
US corporate earnings will grow moderately but fail to exceed estimates
for the first time since the Great Recession. “Since the start of the
economic recovery in 2009, earnings have consistently exceeded
expectations. However, the pace of earnings growth began to slow in 2011
and we believe that trend will continue in 2012, suggesting that
earnings growth expectations will not be met in the coming year,” Doll
said. “On balance, earnings reports will be acceptable, but not stellar.”
While estimates for 2012 earnings for the S&P 500 are currently around
$108, Doll believes that $103 is more likely, with about 6 percent
earnings growth.
At the same time, Treasury rates are likely to move somewhat higher in
2012 if the ”crisis premium” that has kept risk assets cheap and
Treasury rates low lessens, he said. “If the ‘left-tail’ risk of the
European debt situation lessens, risk assets should perform better, with
a reduction in credit spreads of all types,” Doll said.
US Stocks Will Post Double-Digit Gains, Outperform Non-US Markets
US equities will achieve a double digit percentage gain in 2012 as
multiples rise modestly for the first time since the recession. “After
contracting by about 15% in 2011, valuations will expand in 2012 as
confidence improves on the back of acceptable, non-recessionary economic
growth along with continued low inflation and interest rates,” Doll
said. “Should we see the sort of ‘muddle-through’ environment we expect,
that should be enough to bolster investor confidence, resulting in an
inflow into equities.”
Doll’s year-end target for the S&P 500 is 1,350-plus (the index closed
at 1,257 on the last trading day of 2011).
With reasonable earnings growth and cheap valuations, US equity markets
should outperform non-US markets for the third year in a row, he
believes. “Emerging markets lately have significantly underperformed,
due largely to monetary tightening based on inflation concerns, leading
to economic slowdown,” Doll said. “At some point, perhaps during 2012,
emerging market equities will resume outperformance.” At the same time,
Doll believes that the debt crisis in Europe and Japan’s persistent
structural problems will hold those regions back relative to the United
States.
Predictions for 2012
Here are Doll’s predictions for 2012.
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1.
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The European debt crisis begins to ease even as Europe experiences a
recession.
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2.
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The US economy continues to muddle through yet again.
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3.
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Despite slowing growth, China and India contribute more than half of
the world’s economic growth.
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4.
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US earnings grow moderately but fail to exceed estimates for the
first time since the Great Recession.
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5.
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Treasury rates rise and quality spreads fall.
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6.
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US equities experience a double-digit percentage return as multiples
rise modestly for the first time since the Great Recession.
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7.
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US stocks outperform non-US markets for the third year in a row.
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8.
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Dividends and buybacks hit a record high.
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9.
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Healthcare and energy outperform utilities and financials.
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10.
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Republicans capture the Senate, retain the House and defeat
President Obama.
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The 2011 Scorecard
Doll also offered a “scorecard” recapping his year-ago predictions for
2011. For 2011, seven of Bob Doll’s predictions were correct, which, as
Doll states, “is right in line with our long-term average of between
seven and eight.”
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1.
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US growth accelerates as US real GDP reaches a new all-time high.
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SCORE = CORRECT
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2.
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The US economy creates 2 million to 3 million jobs in 2011 as
unemployment falls to 9%.
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SCORE = HALF-CORRECT
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3.
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US stocks experience a third year of double-digit percentage returns
for the first time in over a decade as corporate earnings reach a
new all-time high.
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SCORE = HALF-CORRECT
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4.
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Stocks outperform bonds and cash.
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SCORE = HALF-CORRECT
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5.
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The US stock market outperforms the MSCI World Index.
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SCORE = CORRECT
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6.
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The United States, Germany and Brazil outperform Japan, Spain and
China.
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SCORE = CORRECT
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7.
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Commodities and emerging market currencies outperform the dollar,
euro and yen.
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SCORE = HALF-CORRECT
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8.
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Strong balance sheets and free cash flow lead to significant
increases in dividends, share buybacks, mergers and acquisitions
(M&A) and business reinvestment.
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SCORE = CORRECT
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9.
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Investor flows move from bond funds to equity funds.
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SCORE = INCORRECT
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10.
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The 2012 presidential campaign sees a plethora of Republican
candidates while President Obama continues to move to the center.
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SCORE = CORRECT
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Final 2011 Scorecard:
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Correct:
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5
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Half-Correct:
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4
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Incorrect:
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1
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Total:
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7 out of 10
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About BlackRock
BlackRock is a leader in investment management, risk management and
advisory services for institutional and retail clients worldwide. At
September 30, 2011, BlackRock’s AUM was $3.345 trillion. BlackRock
offers products that span the risk spectrum to meet clients’ needs,
including active, enhanced and index strategies across markets and asset
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management, advisory and enterprise investment system services to a
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Headquartered in New York City, as of September 30, 2011, the firm has
approximately 10,200 employees in 27 countries and a major presence in
key global markets, including North and South America, Europe, Asia,
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please visit the Company's website at www.blackrock.com.
About The BlackRock Investment Institute
The BlackRock Investment Institute is a global platform that leverages
BlackRock's expertise in markets, asset classes, and client segments.
Launched in 2011, the Institute's goal is to produce information that
makes BlackRock's portfolio managers better investors and helps deliver
positive investment results for our clients.
The opinions expressed are as of December 30, 2011, and may change as
subsequent conditions vary. The information and opinions contained in
this material are derived from proprietary and nonproprietary sources
deemed by BlackRock to be reliable, are not necessarily all-inclusive
and are not guaranteed as to accuracy. Past performance is no guarantee
of future results. There is no guarantee that any forecasts made will
come to pass. Reliance upon information in this material is at the sole
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investing involves additional risks, including risks related to foreign
currency, limited liquidity, less government regulation and the
possibility of substantial volatility due to adverse political, economic
or other developments. The two main risks related to fixed income
investing are interest rate risk and credit risk. Typically, when
interest rates rise, there is a corresponding decline in the market
value of bonds. Credit risk refers to the possibility that the issuer of
the bond will not be able to make principal and interest payments. Index
performance is shown for illustrative purposes only. You cannot invest
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Jessica.greaney@blackrock.com
Source: BlackRock, Inc.