Debt crisis to bring market pain in 2012

BOND and equity investors should brace themselves for another torrid year as the Eurozone debt crisis enters “a final phase”, two senior executives at City fund manager Fidelity warned yesterday.

Stock markets will see another year of high volatility and falling prices as the current crisis of confidence in weak states’ debt escalates into a “global sovereign crisis for developed economies”, warned Dominic Rossi, Fidelity’s global chief investment officer for equities.

Andrew Wells, Fidelity’s global chief investment officer for fixed income, said bond markets were also likely to suffer as investors lost faith in safe havens.

“In government bonds, we are seeing a reappraisal of what constitutes a safe haven,” he said. “The realisation that some of the largest risks in the bond universe reside in what was seen as the lowest-risk end of the spectrum is a watershed moment.

“Sovereign defaults will remain the major concern for markets in 2012.”

Rossi said investors should target stocks offering high dividend yields for income, as “the prospect of capital appreciation is very low in developed equity markets”.

But he said high market volatility “may also mark the last down-leg of the debt crisis, as equity markets are excellent discounting mechanisms.”

Wells said the rising risk associated with sovereign bonds was making aggregate bond indices – and the funds that track them – increasingly hazardous. “Around half of the risk in the Bank of America Euro Aggregate Bond Index comes from sovereign bonds. More worryingly, the nature of that risk is highly correlated since if one peripheral nation leaves the Eurozone, it increases the likelihood that others will follow,” he said.