This week’s pounding of the euro by worried investors decamping for the strengthening US dollar (and abandoning gold and other commodities) shouldn’t come as much of a surprise as we look into 2012.
Europe, the eurozone and the euro will be the big themes next year, just as they were for the last half of 2011 and the middle months of 2010.
And the issues were have seen in recent weeks, fiscal stability, the search for a "Big Bazooka" to defend the likes of Italy and Spain, and that running sore, Greece, won’t go away over the break.
This justifiable pre-occupation with the eurozone and the currency showed up in the December survey of big global and regional fund managers by Merrill Lynch/Bank of America Securities.
In it, nearly half of all institutional money managers now fear a partial break-up of the eurozone, and nearly 75% predict that America’s credit rating will be downgraded still further by ratings agencies.
The survey polled 190 major institutional investors with about $US600 billion under management and a further 137 managers managing US$332 billion, participated in the regional surveys.
It was conducted from December 2 to 8, so it ended just before the latest questionable deal from the latest EU summit in Brussels last Friday which now seems to be slowly falling apart.
Some 44% of fund managers say they expect at least one country to leave the 17-member eurozone and a third believe that will happen by the end of next year.
But offsetting that, nearly half of the panel (48%) believes that no member state will exit the euro in 2012 or the foreseeable future.
But in total, 45% expect a member to depart in the foreseeable future, with 7% undecided.
On the further downgrading of US sovereign debt, 48% of mangers predict it will happen as early as next year.
Rating agency Standard & Poor’s downgraded US debt for the first time in August.
The gloom in the survey wasn’t just about Western government finances either.
Big fund managers say the big picture (macroeconomic) economic outlook remained bearish.
Fewer than one third of respondents to the survey predicted stronger global growth in 2012, while liquidity conditions were rated as the worst since April 2009.
Inflationary expectations also fell to their lowest levels since March 2009, suggesting that the prospect of deflation may be weighing on investors’ minds.
BofA warned in commentary that, "key indicators of market sentiment… show parallels with the credit crunch months of early 2009".
A large balance of money managers expect the global economy to weaken and for earnings to fall over the next year, and nearly all of them expect the Chinese economy to continue to slow.
Right now money managers are holding a lot of cash — an average balance of 4.9% of their assets.
Cash balances are typically high before a rally: they were also high in 2008-9 and in 2002-3.
But that could be wishful thinking by some commentators who see this as a bull point and ignore the real reason for many managers being overweight cash: they remain fearful about the eurozone and the great unknown of what happens if the euro collapses.
As a result, investors say they are heavily underweight bank stocks and European equities.
And Japanese and British stocks are also out of favour.
Low-yielding bonds are also unpopular, even though inflation fears have eased.
Investors are gearing for below-trend growth and inflation in 2012 by moving into US equities, even though there are those fears about a credit rating downgrade and concerns about the strength of the economy
A net 50% say the outlook for US profits is most favorable (up from 47% last month), while 72% say the euro region has the least favourable outlook.
(This is as more and more companies warn or downgrade their sales and profit outlooks for either the 4th quarter or early 2012.)
They also see the dollar firming and euro weakening in 2012 (which is happening now in a rather big way).
Within sectors, investors are pushing into pharmaceuticals and staples (food and retailing) and reducing exposure to technology, industrials and discretionary.
The survey reveals that some managers dipped into cash reserves to make an end-of-year move into equities with the US their preferred destination.
A net 8% of asset allocators are overweight equities this month, compared with a net 5% underweight in November, but that was due to one region, the US.
"With improving growth prospects, U.S. equities are seen as a popular destination and a refuge from turmoil," said Michael Hartnett, chief Global Equity strategist at BofA Merrill Lynch Global Research.
"Investors are slightly more optimistic about equities but retain a defensive approach, so that means reduced European exposure and a preference for counter-cyclical stocks," said Gary Baker, head of European Equities strategy at BofA Merrill Lynch Global Research.
On liquidity the survey’s results were very interesting as we head into 2012.
They help to explain why the move by the European Central Bank to lend money up to three years to the eurozone’s banks was such a welcome move.
That’s also why the move by the six major central banks to boost US dollar liquidity in the eurozone was also very welcome.
