LONDON The global economy is positioned for "a slow turn" in 2013, with tentative fiscal relaxation in Europe, a sustained U.S. housing recovery and signs of renewed confidence in financial markets, says BlackRock.
Ewen Cameron Watt, chief strategist at the BlackRock Investment Institute, said aggressive monetary and policy action had effectively insured the liabilities of several key financial systems, raising prospects for markets to surprise on the upside next year.
"Here we are in the fifth year since Lehman, we've had over $10 trillion of central bank balance sheet expansion, more than 400 interest rate cuts and massive fiscal stimulus," Cameron Watt told the Reuters Investment Outlook 2013 Summit in London on Thursday.
"It's pretty clear that if you create an awful lot of liquidity, you tend to smooth out volatility because there is so much money around for financial assets," he said.
While sweeping fiscal and regulatory reforms had started to compress familiar investment risks, Cameron Watt said markets had become obsessed with analyzing policy, making it tougher for investors to identify buying signals on reprised securities.
But with almost all fixed-income assets subjected to "one of the greatest price-fixing episodes in history", interest in higher-risk assets such as European equities and U.S. mortgage-backed securities was on the increase.
"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," Cameron Watt said.
The U.S. economy was set for a decent run in 2013, thanks to a housing market recovery that was boosting values of the principal collateral upon which its banking system depends.
Politicians desperate to avoid another shock in financial markets will resolve the fiscal cliff, Cameron Watt said, and the Federal Reserve will continue to prioritize jobs growth in policy that could lead to further tax rises and spending cuts.
But in a surprising contrast, Europe was likely to see a softer, more pragmatic approach to austerity and fiscal demands imposed on the weakest members of the monetary union in 2013, as indicated by this week's forgiveness of Greek debt, Cameron Watt said.
"The troika have blinked and have introduced this concept of a cyclically adjusted structural deficit by extending Greece's debt for another two years ... that is implicit fiscal loosening," he argued, referring to the three bodies leading the euro zone rescue plan: the European Commission, European Central Bank and International Monetary Fund.
"A lot of the fiscal adjustments that have been made in the likes of Italy, Greece and Spain, are front-end loaded ... and there are also likely to be tax cuts in Germany before the election," he added.
Ireland's widely praised efforts to revive its indebted economy owed much to its favorable tax regime, a model that has attracted international investment and helped to grow domestic tax collection without unpopular tax hikes.
However, while appetite for risk assets was rising, and last year's crippling fears of a messy euro break-up have been largely soothed, celebrations of a return to rapid economic growth would be premature, Cameron Watt said.
"The surprise for next year is that European growth turns out to be incredibly anemic but not quite as bad as people expect," he said.
"Whichever way you look at it, economic growth prospects are very poor but it's a question of how poor it turns out relative to expectations."
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(Editing by Susan Fenton)