The biggest conundrum for savers and investors looking to 2012 is that there's virtually nowhere to hide.
Faced with the real threat of an era-defining systemic shock from a fracturing, or even disappearance, of one of the world's biggest reserve currencies, "worst-case" scenarios for the year ahead are simply without precedent in the modern era.
The risk of a breakup of the 17-member eurozone — involving messy sovereign defaults, bank runs, capital controls and a legal minefield of broken contracts — would reverberate around the globe and threaten recession, even depression.
Such is the uncertainty surrounding the euro and its future that few if any of the asset managers attending Reuters 2012 Investment Outlook Summit in New York, London and Hong Kong next week can be confident about exactly where global markets will be trading a month from now, never mind a year.
A potentially divisive U.S. presidential election year that puts many policy initiatives on ice thickens the fog for global investors. And popular backlashes against government austerity and voter anger over a malfunctioning of the global capitalist system carry a host of regulatory and political risks.
Decisions about asset allocation, relative market values and top investment picks, as a result, are taking a backseat to concerns about accessing and preserving cash, navigating extreme volatility, and contingency planning for anything from controls on cross-border transactions to security threats.
"This is difficult and dangerous and you need to be careful. There are very few places to hide," Richard Cookson, Global Chief Investment Officer at Citi Private Bank, told Reuters.
"This is one of the defining moments in European and global economic history and if it goes bad — it gets very, very bad indeed," he said. "You have to switch off your emotions and look at what your exposures are and how you can protect your wealth."
Cookson said there was already a clear shift among depositors, savers and investors to locate with stronger and better capitalized banks least affected by the euro crisis. He advises clients to look at long-dated U.S. Treasuries, UK gilts, blue-chip corporate debt or safer, dividend-yielding stocks.
But he said the problem for investors is that potential losses everywhere from the worst-case scenarios were far greater than any likely gains from a resolution.
"It's not even as simple as avoiding everything European because you cannot be bullish about assets in the United States, particularly equities, while being that incredibly bearish about Europe.
"You can hedge the risk of a currency going down sharply and hedge against it going up, for example, but how do you hedge against it disappearing altogether?"
EXISTENTIAL THREAT TO EURO
The euro sovereign debt crisis has deepened into year-end without adequate policy solutions to date and is already spreading worldwide via European bank deleveraging everywhere and looming recession across the continent.
U.S. and UK investors polled by Reuters this week continued to withdraw money from European bond markets as almost two years of rolling creditor strikes across the zone move to countries where current bailout funds would not be enough to stop default.
Over the next 13 months Italy, Spain and France together have to raise on average a massive 17 billion euros ($22.88 billion) of government debt every week, raising the risks of a dire funding accident and all its implications.
Potential solutions from European Central Bank money printing to joint bond issuance are still being stymied by German objections.
"The political and policy paralysis at the heart of Europe has raised the specter of a global recession, and greater uncertainty and volatility for asset markets," said Neil Michael, executive director of investment strategies at London & Capital.
Stressed European banks hit by ailing euro sovereign assets and stricter capital ratio rules are expected to cut as much as 3 trillion euros of lending worldwide next year, and more than 5 trillion of European bank loans split equally to the United States and emerging markets at large are also at risk.
The U.S. economy has picked up from its late summer funk, helping Wall Street equities outperform as the year closes and in line with what many asset managers predicted at last year's Reuters investment summit.
But investors seeking traditional safe havens from a systemic eurozone collapse and worldwide recession next year are already facing either overpriced, officially capped or extremely volatile securities.
Real yields on government debt in the United States, Britain and Germany are already deeply negative. Gold has already more than doubled in price in four years and is prone to wild and sudden speculative corrections. And the Swiss National Bank this year pledged to cap the soaring Swiss franc at 1.20 per euro.
Aside from pricey British gilts, which have seen some spillover demand from investors fleeing eurozone debt, other relatively healthy non-euro markets in the region — such as Sweden or Denmark — are not seen as liquid or deep enough for investors needing cashable safety.
A survey released by Allianz Global Investors this week of 140 European institutional investors, managing almost a trillion euros, highlighted market volatility as the biggest risk over the next 12 months, followed by sovereign debt and falling equities.
Almost two thirds saw "tail risks" as a major concern, with diversification and more active risk management the best way to cope. About half now saw "major risks" from either dealing with financial counterparties or a lack of liquidity.
What's more, these mostly pension fund managers are fearful of falling yields everywhere. Although a quarter of respondents viewed a split of the eurozone most likely to happen, some 80 percent still thought the euro would survive.
Yet few now are fully confident of any outcome. As Citi's Cookson said separately: "Just because an outcome would be catastrophic doesn't mean it isn't going to happen."
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