Investors should expect modest returns throughout 2012

by JUSTIN T. HILLEY

Investors should expect modest returns in 2012 as a result of anemic global economic growth and weakening consumer spending, according to a Bank of America Merrill Lynch (BAC: 4.985 -4.13%) report released Thursday.

Considering a looming recession in Europe, a still-struggling U.S. economy, high oil prices and slower growth in China, BofA Merrill Lynch analysts forecast global economic growth of about 3.5% next year.

"The global economy can weather a normal size recession in Europe, in our opinion," said Ethan Harris, co-head of the bank's Global Economics Research. "The U.S. faces its own challenges, with gradual fiscal tightening and considerable uncertainty around policy after the election. As a result, while we expect solid 3% gross domestic product growth in the current quarter, we look for growth to slow to just 1% by the end of 2012."

Moody's Analytics expects U.S. GDP growth of 2.6% in 2012, an estimate they say is contingent on European debt concerns and domestic policy. They see American unemployment, which is currently stands at 8.9%, remaining high in 2012, while interest rates and inflation remain low.

BofA Merrill Lynch analysts expect Europe to see a mild recession, while emerging market economies will see growth of 5 to 6%. Asia should remain the most resilient with growth of 7.1% and Latin America should see growth of 3.3%.

Last month, a BofA Merrill Lynch survey found that global investors are turning to U.S. and emerging market equities to escape Eurozone troubles.   "The very real risk of policy mistakes causing a recession in the U.S. or a hard landing in China means that investors should conservatively allocate assets in 2012," said Michael Hartnett, the bank's chief global equity strategist.

Despite their short-term caution, analysts expect global equities to rally by 10% next year from current levels, aided by liquidity, modest earnings growth and cheap valuations. "In a bullish scenario, 2012 could represent the beginning of the end of the great bear market in equities," analysts said.

And once again, U.S. consumers will weaken. The bank's U.S. economics group expects the recent momentum from consumer spending to subside in coming quarters without stronger jobs creation or wage growth. Consumer de-leveraging will remain a drag on the U.S. economy in 2012.

Financial services firm Keefe, Bruyette & Woods said this week that even if home prices and household leverage stabilize next year, consumers' mortgage debt will continue to contract over the next several years because of high credit losses.