Two thirds of investors think that Europe could slump into recession in 2012 without either the US or China accompanying it, according to a survey of just under a thousand Barclays Capital clients conducted in November. Conversely, only 3% of clients think the US or China could slide into recession without Europe, evidence that the majority of investors view recession fears in 2012 to be connected to Europe.

Not surprisingly, pessimism about Europe stems from concerns about the euro area crisis, which nearly 40% of investors cite as the key theme for markets in 2012. A further 22% believe elections and politics in the advanced economies to be key, likely reflecting concerns about the ability of policymakers to tackle fiscal challenges ahead. More than 60% of equity investors and close to 70% of FX investors expect contagion from the European crisis to matter most for equity markets over the next three months.

Almost 50% of respondents expect at least one country to leave the euro area in 2012, with 35% of investors expecting the breakup to be limited to Greece only, and 1 in 20 expecting all five "peripheral" economies to exit next year. Reflecting pessimism about the likelihood of a fast resolution to Europe’s crisis, fewer than 1% of rates investors are very confident that a “grand plan” could be arrived at in the next three months, whilst more than half expect policymakers to arrive at a partial solution that will be a "stop-gap" only. The form of the eventual resolution drew a wide array of responses from rates investors. The mode view is that the ECB will indicate that it is prepared to buy enough sovereign debt to stabilise markets, with investors split 4:3 between those who think the purchases will come only after a more stable political situation in Greece and Italy and those who expect the buying to come anyway.

The consequences of a potential euro area breakup should not be overstated though. The general view appears to be that if Greece were to leave the euro area, it would not necessarily be the start of more broad-based weakness for EUR: nearly three fifths of FX respondents expect a stronger EUR to result, though most after an initial depreciation. Only 7% of rates investors expect a messy break-up of the euro area, while 20% expect the crisis to result in fiscal union.

Outside of Europe, developments are expected to be more promising, with almost 60% of rates investors saying there are few alternatives to US Treasuries, even if the Super Committee in the US fails to agree on cuts (which we now know was the case). Only 10% of FX investors expect US fiscal issues to dominate. Among equities investors, slightly more than 40% of respondents expect US markets to outperform (EM Asia is next with 29%). The expected outperformance of the US in credit is even greater: 80% of investors expect US corporate credit to do best, with most favouring investment grade. The outperformance of US assets may partly be a function of anticipation of more QE from the Fed, though most do not expect it: only 30% think that a further expansion of the Fed's balance sheet will be announced, while nearly half think that Operation Twist will be continued – almost all without an increase in its size.


source: BarCap