The Global Investment Committee of Morgan Stanley Smith Barney said in its January 2012 market commentary that it expects not just Europe, but the United States, to slip into recession.

“We expect recessions in the U.S. and Europe but not in the large [Emerging Market] economies,’’ the committee said in its monthly market brief.  The largest emerging nations, in general, are considered China and India.

“Accordingly, we expect global growth to remain positive,’’ it said. But “the policy options to combat recession in [developed] economies are limited

“The Federal Reserve is running out of tools, and further European Central Bank easing at this point is too little, too late. Moreover, fiscal policy is tightening in the U.S. and Europe, and Standard & Poor’s recently downgraded sovereign debt ratings for nine Euro Zone nations,’’ it said.

The commentary came, in fact, as chairman Ben Bernanke indicated the Federal Reserve expected to keep its lending rates near zero, through 2013.

The fundamentals and the policy options in emerging economies are much more robust, MSSB’s investment committee said. And it expects inflation to abate in most countries.

Here’s an excerpt:

  • PROFITS. Consensus earnings-per-share (EPS) forecasts are for double-digit growth for US and global equities in 2012. If our recession view is correct, those estimates should come down. Meanwhile, consensus net global and regional EPS revisions are still falling, though the 52- week forward EPS figure for US equities is rising slowly.
  • INTEREST RATES. DM central-bank policy rates are likely to remain low for an extended period. A third round of Quantitative Ease in the US and a first round in Europe are both likely soon. A few EM central banks have already begun to ease.
  • CURRENCIES. In the short term, US-dollar strength will likely persist, related to the anticipated sell-off in risk assets, and the European debt situation should lead to a lower euro. Longer term, we believe that the major DM currencies will decline relative to several EM currencies.

Tom Steinert-Threlkeld writes for Securities Technology Monitor.

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