Pension funds can expect some stormy months ahead with a possible recession both in Britain as well as in the Eurozone in the first six months of 2012, according to Legal and General Investment Management (LGIM)

Tim Drayson, an economist at LGIM, forecast a very difficult 2012 on 14 December, saying that equity markets were still likely to be volatile in 2012. He also said that LGIM was recommending that investors look towards the US markets rather than Europe.

The largest investor of pension fund money in the UK warned UK investors that seeing the Euro's troubles as 'their problem' was not a realistic position to adopt in today's globalised economy. He pointed out that the UK would not only be affected by the fact that Europe was its main trading partner, but also because a European slowdown would be felt in the US and China, adding to a more difficult recovery.

 "Although safe government bonds such as the US, UK and Germany look expensive, weak growth, risk aversion and further quantitative easing should keep yields low. Credit markets will be volatile but are looking more attractive, particularly for those with more long-term investment horizons," said Drayson.

He also added that European banks have been major providers of credit to the global economy, saying: "These problems will be felt globally. Even in the unlikely event of Europe's leaders finding an immediate and comprehensive solution to the debt crisis, a lot of damage has already been done."

As far as individual EU nations go, Italy is expected to fare worst in the Euro area, as the measures introduced by the new technocrat government are expected to take some time to have an effect. The lopsided debt-to-GDP ratio will continue to rise in the meantime. Drayson also predicted that France would perform poorly next year.

"We expect to see a sharp contraction in investment as the corporate sector will remain cautious. Add austerity measures and low consumer confidence, and you have all the ingredients for a recession" he said.

First published 15.12.2011

azeevalkink@wilmington.co.uk