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Investors should expect another turbulent year of market volatility during 2012 from a mix of heightened policy risk, political uncertainty, low growth and low interest rates, all of which will translate into modest investment returns, according to BofA Merrill Lynch Global Research’s 2012 Year Ahead Outlook.

Against a backdrop of a looming recession in Europe, a still-struggling U.S. economy, high oil prices and slower growth in China, BofA Merrill Lynch Global Research’s macro analysts forecast global economic growth of approximately 3.5 percent during 2012. The team anticipates that credit and commodities will outperform equities in the first half of 2012 and recommends that investors overweight corporate and emerging market bonds.

“The global economy can weather a normal size recession in Europe, in our opinion,” says Ethan Harris, co-head of Global Economics Research. “The U.S. faces its own challenges, with gradual fiscal tightening and considerable uncertainty around policy after the election. As a result, while we expect solid 3 percent GDP growth in the current quarter, we look for growth to slow to just 1 percent by the end of 2012.”

Michael Hartnett, chief Global Equity Strategist and chairman of the BofA Merrill Lynch Research Investment Committee (RIC), notes that the very real risk of policy mistakes causing a recession in the U.S. or a hard landing in China means that investors should conservatively allocate assets in 2012.

"Despite our short-term caution, however, we anticipate that global equities could rally by 10 percent next year from current levels, aided by liquidity, modest earnings growth and cheap valuations. In a bullish scenario, 2012 could represent the beginning of the end of the great bear market in equities,” adds Hartnett.

Alberto Ades, co-head of Global Economics Research and head of GEMs Fixed Income Strategy, says that emerging markets will de-couple from the U.S. and Europe, but the combination of lower growth in developed economies and moderately high commodity prices place emerging economies in a difficult position.

“The global growth malaise will mute export activity and temper demand for commodities, creating significant risks for emerging market investors in 2012,” notes Ades.

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