By Patrick Artus

We believe that the financial markets and the allocation of savings between regions and asset classes will primarily be influenced by three factors in 2012. The first factor, obviously, is the nature of the crisis in the eurozone and how fast it can be stopped, which has an impact on all risky asset prices, and which has led to a few assets being selected as safe-haven assets. The second factor is the size of the growth gap between the United States and the eurozone; if growth is far stronger in the United States, investors will head for the U.S. dollar and U.S. assets. Lastly, the third factor is the magnitude of the slowdown in growth in emerging countries, due to the weakness of the economies in OECD countries, and in certain cases, up to now, due to restrictive monetary policies and capital outflows. But monetary policies are starting to become more expansionary, and the exchange rates of emerging countries are depreciating. Nevertheless, if growth in emerging countries continues to slow down despite these developments, investors will switch out of emerging assets and into other assets, and this is already happening at the end of 2011.

We could imagine a scenario where the eurozone crisis is still present in the first part of the year, after which it becomes imperative to end the crisis, leading to a renewed convergence between asset prices, especially between the interest rates of the Northern and the Southern eurozone countries.

Let us now look at the situation relative to the United States and the eurozone. U.S. growth is and will be stronger than eurozone growth. This is mainly due to households’ consumption behavior. The abundance of liquidity in the U.S. has probably encouraged households to consume part of their liquid savings, which explains the fall in the U.S. household savings rate.
The stimulation of consumption in the U.S. is leading to an improvement in the labor market, and therefore to a recovery that seems to be self-sustaining. The result could therefore be a considerable growth gap between the U.S. and the eurozone, which would drive investors to U.S. assets: equities, corporate bonds, commercial real estate, etc. The U.S. stock market is already significantly outperforming the European stock market.

Let us now look at the situation in emerging countries. Growth in emerging countries is decelerating due to the weakening of their exports, primarily due to the slowdown in exports to Europe. Their monetary policies are now becoming more expansionary; with, for example, the reduction in the reserve requirement ratio in China and the cut in Brazil’s key intervention rate. However, boosting credit and activity will take time. Likewise, the depreciation of emerging countries’ exchange rates against the dollar, which is due to capital outflows, will boost these countries’ foreign trade, but only gradually. Accordingly, there will be a slowdown in emerging countries in 2012. These countries will therefore no longer be an Eldorado for investors where they can simultaneously find vigorous growth, exchange-rate appreciation and rising financial markets. If the loss of growth in emerging countries were to be too pronounced, investors might switch from emerging countries to OECD countries (and this has already started) on a more permanent basis, which would be a total reversal of the trend seen in the period 2002-2008.

We therefore believe that three factors will steer the allocation of savings in 2012, between regions as well as between asset classes. The first factor is the improvement or, conversely, the worsening of the eurozone crisis, which will steer the allocation of financial investments between risky and non-risky assets. The second is the size of the growth gap between the United States and the eurozone, which will steer the allocation of investments between the United States and Europe; and the third factor is the magnitude of the slowdown in growth in emerging countries, which will steer the allocation of financial investments between emerging and OECD countries.

Patrick Artus is the chief economist of Natixis.