The European debt crisis will likely continue to cast a shadow on the markets in the coming year, with a full solution to those problems unlikely to emerge in 2012, a panel of investment executives from BlackRock, Lord Abbett and Pacific Investment Management Company said Monday.
“We do not see a resolution this year. In some sense, there isn’t a resolution,” Bob Doll, chief equity strategist for fundamental equities at BlackRock, said.
That is because Europe needs to find a way to become unified, have a unified monetary policy, but a disparate fiscal policy, according to Doll. So far, he said, they have not found a way to accomplish those goals.
“Our view that Europe doesn’t fall apart is not one that Europe solves its problems. It means that it just muddles through,” Doll said.
That means a European bank is unlikely to say it needs to be nationalized or declare bankruptcy, Doll said. At the same time, authorities will be likely to just “hit the ball and buy some time” the way they did at the end of last year, he said.
Milton Ezrati, partner, senior economist and market strategist at Lord Abbett, said he agreed with Doll that Europe is definitely not going to resolve its crisis in the coming year. That comes as they will continue to be impeded by problems with the Euro, he said.
Not only is Europe unable to devalue the Euro to relieve its strains, but it will also have to contend with the Euro’s bias toward Germany and against the peripheral nations, Ezrati said. That will make for what he called an “uphill battle,” unless they restructure the currency, which he also said was unlikely.
For 2012, that means that European authorities are probably just beginning to address their problems.
“The Europeans, who up until late last year, were trying to get this thing done on the cheap, now realize that’s no longer possible,” Ezrati said. “And they say that the realization that you have a problem is the first step.”
Economic growth overall should be slow in 2012 because of the need to de-lever, Doll predicted. Like Europe, Doll said the U.S. will also continue to “muddle through,” with 2% to 2.5% growth.
“Don’t get carried away with the recent good news,” Doll said of the U.S. economy. “We’ll take it, and we’ll take it as long as we can, but we’re not going to grow above trend.”
China and India will also experience slower growth in the coming year than they did in 2011, Doll said. But when the size of their growth is combined with the size of their economies, they will make up more than half of the growth of the GDP of the world this year, Doll predicted.
Earnings growth should be modest this year, with around 6% growth in the U.S. this year, Doll said. Dividends and buy backs, which rose 35% last year compared to the year before, will continue to rise another 20%, he said, putting them at an “all time high” surpassing the record in 2007.
As a result, BlackRock is favoring both dividend paying companies and companies without dividends but positive cash flow, Doll said. The firm’s favorite cyclical sector is energy, while their favorite defensive sector is health care.
Ezrati at Lord Abbett said his firm is seeing value in equities and credit sensitive fixed income areas, where he said he expects to continue to see value in 2012.
“We recognize that there will probably be another double dip scare because growth rates are extremely low, and it’s very easy to project as recession,” Ezrati said. So far the “double dip fear mongers are 0 for 2, and if they come out again in 2012, we believe they will be 0 for 3,” he said.
Tony Crescenzi, executive vice president, market strategist and portfolio manager at PIMCO, said he sees positive prospects in high quality company bonds, including industry leaders when it comes to growth rates, cash flows or exposure to growing markets.
Choosing companies with high asset cover ratios, that are high in capital structure or have low betas relevant to the economies, should all serve as positive signs to potentially protect investors, Crescenzi said.
Municipal bonds should also continue to perform well in 2012, he said, with default rates expected to remain low.
“We would look to fortify portfolios that both protect money and potentially grow money,” Crescenzi said.
The panel was hosted by wealth management software and services provider Envestnet.
Lorie Konish writes for On Wall Street.