Investing in 2012 may very well prove to be the year of “risky business” because of the possible rewards and punishments, Prudential Annuities Chief Market Strategist Quincy Krosby said Wednesday.

“You will be punished if you’re not in the equity market when the market feels like celebrating,” Krosby said. “But you will also be punished if you’re not in fixed income when the world is looking at a variation of a shock that it didn’t quite project.”
For Prudential, that means recommending annuities to hedge market risks. But investors can also hedge the market using barbell investing strategies or options, Krosby said.

The comments came as part of Prudential’s latest annual outlook presented in New York on Wednesday. For 2012, a panel of experts predicts that equities and debt market should continue to look up, even as problems in Europe will continue to cast a shadow on the year.

Behind the scenes, the European Union and Germany are probably working on contingency plans, Krosby said, just in case a country like Greece was to change its status in the European Union.

The fact that the European countries may be considering that scenario does not mean that will happen, according to Krosby. Strategically, those countries could likely craft an exit out of the Eurozone for Greece that would work, but could not do the same for the ensuing countries that could follow, she said. Still, that does not mean that kind of exit is impossible.

“There is no government that does not look at options,” Krosby said. “They will deny it until the last minute the same way here in the United States we heard that Lehman Brothers was fine until it wasn’t. We heard that Bear Stearns was fine until it wasn’t. They’re not going to take their cards out.”

Economic conditions in the new year will also lead to a stronger dollar that in turn will test the U.S. markets, according to Krosby. When the U.S. dollar was previously strong against the currencies it was traded against, it was because of strong economic data. Now, however, that boost is coming from outside forces as the Euro weakens.

“We are already seeing it this morning,” Krosby said. “The Euro was weaker, the dollar started to gain strength, and all of the sudden the U.S. market started to stumble. That is going to be a test in the market this year.”

Weak growth will continue in Europe in 2012, said John Praveen, managing director and chief investment strategist at Prudential International Investments Advisers. Peripheral countries may fall deeper into recession and stronger countries like Germany and France will also weaken with demand for their exports. Emerging market countries, by contrast, should have higher growth compared to developed market countries. China should have 8% growth, India, around 7% and Latin America as a whole around 4%, Praveen said.

But even with banks under pressure in both the U.S. and Europe in the coming year, as well as some likely earnings disappointments in Europe, there are still some signs of optimism, according to Praveen. Interest rates are already low, while more cuts are expected. Also, a combination of attractive valuations and low interest rates should allow for more opportunities for expansion.

“The one constant in 2012 is going to be high volatility,” Praveen said. “At the end of the day, we will probably see markets eking out modest gains in a very volatile 2012.”

Lorie Konish writes for On Wall Street.