Cash & Liquidity Management

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The Year of Living Divergently Will 2012 be a re-run of 2011 or will we experience something quite different? We highlight what senior investment leaders across various asset classes expect to be the main themes of 2012.

The Year of Living Divergently

by Mark Stockley, Managing Director and Head of International Cash Sales, BlackRock

Cash, like all other asset classes, is bound to the health of the wider economic environment in which it exists. In recent years, during which we have seen prolonged periods of broad market instability and heightened risk aversion even at the ‘risk-free’ end of the investing spectrum, cash on corporations’ balance sheets has risen to record levels and the emphasis for treasury departments has remained firmly on capital preservation and liquidity. Will this environment remain the status quo for some time to come as global economies slowly grind out economic recovery or could it be that recovery is just around the corner?

Whether recovery comes sooner or later, we thought it provoking to highlight what senior investment leaders across asset classes at BlackRock considered to be the main themes for this year. Will 2012 be a re-run of 2011 or will we experience something quite different?

In the extract below from BlackRock’s Investment Institute report The Year of Living Divergently, senior portfolio managers and leaders at the firm step back and consider the likely macro-economic and investment themes for 2012.

“What lies ahead in 2012 for financial markets? A time when emerging economies and asset prices finally come into their own? A descent into an investment nuclear winter? A re-run of 2011, with rudderless, ‘risk-on/risk-off’ market forces sidelining many investors? Or a sunny upland where policymakers pull the right levers and growth abounds? We believe we are at an inflection point for economics, asset prices and risk appetite. Signs are everywhere: the euro debt crisis looks to come to a head, China and other emerging markets are easing monetary policy to regain growth momentum and the US economy is showing tentative signs of improvement.

We are likely to see a 2012 investing landscape that is very different from last year’s environment of assets moving in lockstep. We have sketched out scenarios of how things could pan out this year, providing a framework for investors to take advantage of new opportunities and to guard against risks.

Divergence and Nemesis

We see an increasing divergence between faster-growing emerging markets and the debt-ridden developed world. The ‘real’ economies and asset prices will likely decouple, helped by emerging markets having the room and cash to stimulate growth. In this ‘Divergence’ scenario, Europe is expected to have a recession followed by a snaillike recovery in 2013. The US economy and Japan muddle through.

The biggest risk is the European debt crisis spins out of control and plunges Europe into a deep recession that spreads to the rest of the world. This ‘Nemesis’ scenario – named after the Greek goddess who punishes the proud – would be bad because the developed world has little firepower left to fight another crisis.

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