What now the so-called safe havens are struggling?

   UK

The crisis in the eurozone, one of the key threats to the UK recovery, continues to unravel fuelled by the failure of EU leaders to come up with a framework to resolve the region’s woes.

The Bank of England’s efforts to stimulate the economy, which has included £275bn of QE, has met with mixed results to date. The various economic indicators – unemployment, industrial output, and consumer demand – point towards a long period of anaemic growth as the economy moves away from debt-driven consumption towards a more balanced export-oriented economy.

The current environment favours borrowers and penalises pensioners and savers via the pernicious effect of inflation. Interest rates have been kept at a historic low (0.5%) since March 2009, during which inflation has peaked at 5.2% – more than twice the Bank’s 2% target.

Despite the less than favourable economic outlook, investors can seek solace in UK companies that are export-oriented, supported by a robust balance sheet and strong cash flow generation.

 Europe

Europe remains deeply entrenched in a sovereign debt crisis, which threatens not only to tear the eurozone apart, but also propel the banking sector into an abyss.

The latter’s woes have been further amplified by the implementation of Basel III and increasing political pressure to punish the financial sector. Uncertainty has led to deteriorating consumer and business confidence, delaying spending and investment decisions, threatening to lead Europe back into a recession.

Although, the adverse economic environment and political uncertainty has damaged investor confidence, it has left many companies on very attractive valuations.

 US

The US has shown growth on the back of continued policy stimuli, especially in the last quarter of 2011. It was the first to enter the credit crisis and is likely to be the first to emerge from it. The US economy created 200,000 jobs in December making it the sixth consecutive positive month, leaving the unemployment rate (8.5%) at the lowest level in nearly three years. The dollar remains the global reserve currency.

Despite the recent good news there is a real danger that the nascent recovery in the US could be arrested by the deeply entrenched economic malaise in Europe. The state of the economy will be front and centre in this election year, with the current incumbent chasing a second term on the promise of better economic prospects.