(Corrects attribution in paragraph 21 to Axa Investment Managers from Axa Investment partners)
By Mike Dolan
LONDON Nov 30 The big "known unknowns", to borrow from former U.S. defence secretary Donald Rumsfeld, are now so familiar to most global investors that they have to think long and hard about risks looming in 2013.
That's not to say money managers see no big pitfalls for next year. On the contrary: the world economy has rarely faced so many threats of political, policy and financial accidents.
And a glance at the election calendar for next year - with polls in Italy, Germany, Israel and Iran - shows there's no shortage of "event risks".
It's just that a dominant triad of make-or-break issues that have hung over world markets for more than two years now - euro survival, the U.S. "fiscal cliff" and a Chinese hard landing - have almost become a tiresome mantra for most fund managers.
Many positioned against these or deserted related markets many moons ago and, for all the punch they still pack, it's now incremental shifts in probabilities that have become key.
The consensus from this week's Reuters Investment Outlook Summit for 2013 was that all three issues remain worrisome, but the menace from each is substantially less than a year ago.
On balance, most see the euro intact for the foreseeable future, with regional markets healing as recession-hit economies stabilise late next year. The United States is widely expected to reach some deal to limit tax hikes and spending cuts that could release pent-up corporate activity. And China may now even see at least a few quarters of a cyclical upswing.
The positive tilt emerges when they combine that with still-extreme investor positioning, unprecedented commitment to monetary policy support and zero official interest rates, a U.S. housing recovery, easing fiscal drags in Europe and structural boosts such as the shale gas revolution in North America.
So much so that many chief investment officers and top fund strategists feel a big market turn may well be in the offing - even if five years of rolling financial, economic and political crises make all of them hyper-cautious in calling it so baldly.
The relentless demands of paying down debt, or deleveraging, may persist for years and keep aggregate world growth subdued. Yet markets should move in advance to price any normalisation.
Ewen Cameron Watt, chief strategist at Blackrock Investment Institute - the research hub of the world's biggest asset manager - saw a "slow turn" on the horizon.
"There's $1.7 trillion of investor cash on the sidelines. It is not going to come back in one go. It's hard to think that world is going to grow very fast. But a grinding bull market is possible."
Barings Asset Management Chief Investment Officer Marino Valensise reckons equity markets and risk assets could make a "substantial rally" over the next 12 months, even if they may have to pay some of that back again over subsequent years.
Giordano Lombardo, CIO at Pioneer Investments, talked of a "normalisation of risk appetite" for investors and flagged a strategic push to accumulate euro zone equities in particular.
But if the three dominant world risks are now in the "well known unknowns" category, what then of the wildcards?
With nearly all funds at this year's summit seeking to cut back on super-expensive government bonds such as U.S. Treasuries, German bunds or British gilts, many nursed longer-term worries about these and related credit spread markets.
Andreas Utermann, CIO at Allianz Global Investors, reckoned the eventual popping of a "massive bubble" in core bonds would hit all markets. But this wouldn't happen as long as central banks kept buying bonds as part of quantitative easing programmes and was therefore probably not a story for 2013.
Utermann saw a real risk of some blowup in the Middle East having a dramatic impact on oil prices and, by extension, a fragile world economy.
Even though hedge funds often thrive as much in big market downdrafts as bull markets, CQS founder Michael Hintze also reckoned regional conflict was a unpredictable variable.
"There's a whole load of geopolitical stuff out there that's absolutely not trivial. You could have Iran, the Middle East, Syria, Nigeria - what happens with narco terrorism in Mexico?" he said. "Who knows what's going to happen in North Korea or the South China Sea where 40 percent of world's trade goes through?"
Axa Investment Managers chief strategist Franz Wenzel was concerned about Japan, still the world's third largest economy. "Japan has, sadly, become a sideshow for many people but it's still a hugely important producer of electronic goods and sharp deterioration there could have ripple effects everywhere."
Valensise at Barings said a wildcard could be "serious social unrest" or an extreme political development in the United States. "With this sort of inequality and political partisanship, you can't rule it out," he said.
Rod Paris, Head of Investments at Standard Life Investments, reckoned another outside risk lay in reforms to battered banking sectors. Doubts and delays might prompt investors to withdraw again and trigger more bank capital stress and deleveraging.
Others worried about unfinished business at the euro zone's core. "France is becoming increasingly uncompetitive. It's elected somebody, frankly, that had an insane economic plan," said Richard Cookson, CIO at Citi Private Bank. "Buying French government 10-year debt at 2.14 percent must count as one of the worst investments in recorded history."
Jeff Kronthal, managing partner at U.S.-based KLS Diversified Asset Management, says he is specifically shorting 10-year French government bonds. "I just struggle with the whole concept of the euro," he said.
But for others, the risk may yet be that solutions in Europe come more quickly and effectively that many now assume.
Referring to this week's deal to relieve Greece's debt burden, Jelle van der Giessen, deputy CIO at ING Investment Management, said it "clearly indicates how Europeans are determined to get this done ... As we saw on a number of occasions this year, we might underestimate that a little." (Additional reporting by Sinead Cruise, Jennifer Ablan, Ingrid Melander, Carolyn Cohn, Sujata Rao, Chris Velacott, Laurence Fletcher, Tommy Wilkes; Editing by Ruth Pitchford)